If you’re a company that owns patents or intellectual property (IP), the Patent Box tax scheme could significantly reduce your corporation tax bill. This scheme allows businesses to benefit from a lower tax rate on profits earned from their patented products and technologies. In this blog, we break down how the Patent Box works and how you can claim this tax relief.
What is a Patent Box?
The Patent Box is a UK tax incentive designed to encourage innovation by offering companies a reduced rate of corporation tax on profits derived from patented inventions. Under this scheme, eligible businesses can benefit from a 10% tax rate on profits from their IP, rather than the usual corporation tax rate, which can go up to 25%. This initiative aims to support businesses that invest in research and development (R&D) and keep their innovation activities within the UK.
Who Can Benefit from Patent Box Tax Relief?
The Patent Box tax relief is available to businesses that generate profits from patented technologies. Industries such as technology, pharmaceuticals, and manufacturing are among the most common beneficiaries, but any business that holds a patent or has exclusive rights to use patented technology can qualify. To be eligible, businesses must meet the following conditions:
- Own or have exclusive rights to use a patent.
- Generate profits from the use, sale, or licensing of patented products or processes.
- Be liable for corporation tax.
- Have made significant investment in developing the patented technology.
Which Profits Qualify for the 10% Tax Rate?
Not all profits are eligible for the reduced tax rate. To qualify, profits must be directly related to patented technology. Here are some examples of qualifying activities:
- Selling Patented Products: This includes the direct sale of patented items or products incorporating patented technology.
- Licensing Patent Rights: If you sell or license your patented technology, the income from these transactions qualifies for the tax relief.
- Using Patents in Manufacturing or Services: If your patented technology is used in the production process or service provision, the related profits are eligible.
The Nexus Requirement and Key Changes
The Patent Box rules were updated in 2016 and 2021 to ensure the scheme aligns with global tax standards and is used fairly. The key change in 2021 was the introduction of the “nexus” requirement, which links the relief to the amount of R&D a company has done.
Under the nexus requirement, businesses must demonstrate a clear connection between their R&D activities and the profits derived from their patents. If the company has significantly contributed to the development of the patented technology, it can benefit from the reduced tax rate. If not, they will not be eligible for the relief.
Key features of the nexus requirement include:
- R&D Connection: A clear link must be established between R&D activities and the profits benefiting from the Patent Box.
- R&D Fraction: A specific R&D fraction is calculated based on the amount of R&D a company has carried out.
- Tracking Costs: Companies must track and report their R&D expenses when claiming the relief.
How the Patent Box Can Benefit Your Business
The Patent Box offers substantial tax savings, especially after the increase in the main corporation tax rate in 2023. Now, even with the main rate at 25%, the Patent Box rate remains at 10%, making it a highly beneficial relief for companies with qualifying IP profits.
The scheme provides an opportunity to reduce your overall tax liability while encouraging reinvestment into further innovation and R&D efforts.
How to Calculate Patent Box Relief
Here’s a simple guide to calculating your qualifying profits under the Patent Box scheme:
- Identify Relevant Profits: Determine which profits come from your patented technology, such as sales, royalties, or licensing.
- Apply the R&D Fraction: This fraction reflects the amount of R&D work your business has invested in compared to the total income from patented technology.
- Calculate the Deduction: Once the R&D fraction is applied, the adjusted profits will be taxed at the reduced 10% rate instead of the standard corporation tax rate.
How to Claim Patent Box Relief
To claim Patent Box relief, your business must opt into the scheme by filing a corporation tax return. You must make the election within two years of the end of the relevant accounting period.
- Early Election: You can opt into the scheme before your patent is granted. This means you can claim relief on profits made during the patent application period.
- Accumulated Relief: If your company applies for Patent Box relief before the patent is granted, any tax relief earned during the application process can be included in the tax return for the year the patent is granted.
Final Thoughts
The Patent Box scheme provides a great opportunity for companies that own patented technology to reduce their corporation tax liability. By understanding how the scheme works and ensuring that your company meets the eligibility criteria, you can take full advantage of the reduced tax rate and save money on your tax bills.
If you’re unsure about how to apply or whether your company qualifies, it’s a good idea to consult with a tax professional to ensure you’re maximizing your relief.
