UK Patent Box Tax Incentive Scheme
Intellectual Property (IP)
The UK’s Patent Box regime is a generous tax incentive that, while less well-known than Research and Development (R&D) tax credits, presents an underutilized opportunity for companies. Especially in the wake of the corporate tax rate increase to 25% from April 1, 2023, UK businesses are finding this scheme increasingly attractive for managing their corporate tax liabilities.
Understanding the Patent Box Regime Introduced in 2013, the Patent Box regime aims to foster innovation within the UK. It offers companies the benefit of an effective 10% corporation tax rate on taxable profits generated from patented technology, medicinal innovations, and botanical innovation rights.
As innovation in fields like artificial intelligence and alternative technologies continues to advance rapidly, companies and entrepreneurs involved in cutting-edge innovation should consider the opportunities offered by the Patent Box.
Have you checked whether your Business is Eligible for the Patent Box Scheme?
To qualify for the Patent Box, a company subject to UK corporation tax must generate profits from exploiting qualifying patented inventions.
A single patented component in a product can potentially bring all revenue from the product under the regime. For instance, if one component of a car, such as an exhaust, is patented, it may be possible to include all taxable profits from the car’s sales in the Patent Box regime. This means that relevant intellectual property (IP) profits would be subject to an effective 10% corporation tax rate, resulting in potential savings of up to 15% on these profits.
It’s worth noting that the Patent Box can also apply to processes, not just products or innovations. More details on this can be found in subsequent sections of this article.
In essence, companies that already hold qualifying patents or have exclusive licenses for such patents granted by the IPO, the European Patent Office, or certain European patent offices, meet the initial eligibility criteria. These companies should consider taking advantage of this highly advantageous regime that complements the R&D tax credit relief system.
For businesses that do not currently possess patents but engage in innovation, it may be worth considering applying for a patent to leverage the benefits of the Patent Box regime.
In all cases, the company must be involved in the development and innovation related to the qualifying IP rights or products incorporating the patented invention.
How to Calculate Your Taxable Profit
The rules and calculations for determining the level of taxable profits subject to a 10% tax rate can be intricate. Identifying the taxable profits derived from patented technology is just the first step; further adjustments are necessary.
These adjustments can be summarized as follows:
- Identifying Relevant IP Taxable Profits: Taxable profits may encompass income and expenses related to patent licensing, royalties, patents used in processes or services, damages, infringement income, and the sale of patent rights. However, the majority of taxable profits usually come from products or product components covered by the patent. HM Revenue & Customs (HMRC) provides detailed guidance on how to categorize qualifying IP income.
- Removing the Routine Return: This step aims to eliminate the profit a business would typically generate if it didn’t have access to IP or other intangible assets.
- Removing the Marketing Asset Return (MAR): This step aims to exclude the arm’s length profit portion related to the company’s brand and marketing assets. For B2B companies, the MAR may be zero.
- Calculating the R&D Fraction: This stage limits the profits eligible for the effective 10% regime, based on the level of in-house or subcontracted R&D work and expenditures related to the development of specific qualifying IP rights. Thus, it necessitates that a company trace and track its R&D expenses for a particular qualifying IP right.
Patent Box Calculations and R&D Tax Relief
The effective 10% tax rate is achieved through an additional deduction within the corporation tax calculation. This deduction either reduces taxable trading profits or generates/increases taxable losses, which can be offset against previous/future taxable profits of the company or its group. Unlike R&D tax credits, this deduction cannot be converted into a cash repayment.
As the Patent Box complements the R&D tax relief regime, companies eligible for either regime should explore the possibility and benefits of claiming under both.
The Patent Box regime is widely recognized as complex. However, the potential benefits of making a Patent Box claim are substantial, making it a worthwhile consideration for companies that meet the qualifying criteria, particularly in light of the UK’s increased headline tax rates since April 1, 2023.
Business owners operating in the manufacturing sector should be particularly aware of the Patent Box relief. HMRC statistics show that the manufacturing sector accounted for over 30% of all relief claims. Across all sectors, approximately 1,500 Patent Box claims are submitted annually, resulting in £1.2 billion in tax relief applied. Since its introduction in 2013, over £6 billion has been claimed up to the 2019-20 fiscal year. Together with R&D claims, the Patent Box relief offers an excellent opportunity for businesses holding patents for their innovations.
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