Many innovative businesses with protected intellectual property (IP) are missing out on the benefits available to them through the Patent Box scheme. The UK’s generous Patent Box scheme can support ongoing innovation in businesses but only if the business has a clear idea of eligibility and IP structural planning to ensure they can elect to the scheme and maximise the benefit. Given the complexities and our experiences with businesses to identify the potential tax benefits of using this incentive, we describe the common pitfalls to avoid when reviewing eligibility.

Overview of the Patent Box incentive

The Patent Box is a government incentive designed to encourage companies to retain and commercialise intellectual property in the UK. Our previous article explores what the scheme is and how you can apply.

Common pitfalls

Development of the patented invention

Many companies are not aware of how development and trading criteria within the patent box scheme are structured, which often prevents them from making a claim. The scheme seeks to connect the qualifying patent to the entity conducting R&D for IP production and commercialisation. A Nexus fraction is applied to the qualifying profits where development is split across the group to try to create a realistic claim that seeks to preferentially reward the entity undertaking the development. It is always worth modelling any claim ahead of electing to the scheme to allow the IP to be moved or restructured to avoid losing out on any potential benefits.

Patent linkage and streaming of IP earnings

A key aspect of the scheme is linking patents to products. If a business has one patent that covers several products this can be simple, but where a company holds a portfolio of patents where some are close to expiry, this patent linkage can be critical to retaining maximum benefit from the scheme. We assist companies in scoping their patent portfolio for likely Patent Box candidates and creating the profit streaming to assist the potential claim benefit.

Once the patent portfolio is mapped to products, there is necessity when multiple patents are present for earnings to be streamed, which can be an obstacle for newcomers to the scheme. In particular, claimants tend to find they lack the records or documentation to prove how income streams are linked to the underlying IP portfolio. We can help plan your accounting and record keeping remaining consistent with these complex rules. Planning ahead of making a claim can streamline this cost capturing process and providing certainty over expected benefit as the company approaches year end.

Global activities

The relief extends to income from worldwide sales of patented products, a feature of the Patent Box concept that is often missed. To get the most of this incentive, businesses must examine their global activities and earnings flows. As licences are included in the Patent Box arrangement, it may be advantageous to establish the United Kingdom as an IP holding company.

Ownership of qualifying patent

To qualify, a company must have a patent awarded by the UK Intellectual Property Office, the European Patent Office, or a designated EEA nation. Design or copyrights do not qualify under this scheme, even if they cover a new product that has been the subject of an R&D claim. The Patent Box can be accessed by having legal ownership of an invention or having an exclusive license to commercially utilise a patent. Many businesses still ignore the awarding office limitation and will apply for a US patent only, thus cutting themselves off from this potential tax saving. Patent protection planning and considering how these overlays with the patent box rules is critical to a successful claim.

Early election

A company can elect early, before a patent is awarded, to claim tax reduction on qualifying revenues earned between the filing of the patent application and the grant of the patent. This is known as the patent pending period. The accumulated relief is claimed in the year the patent is awarded on the tax return. However, electing to the scheme too early and when the product is not making a profit, can be detrimental and reduce any subsequent benefits. Therefore, careful planning is required. Buzzacott offers a modelling service to plan out Patent Box submissions to support this process.

How we can help

We can help you develop a business plan for patent box and ensure your business activities are structured correctly to access the benefits of a patent box claim. We also have experience with putting in place streaming documentation and processes to ensure that the final claim is robust and defendable. Our team is familiar with the intricacies of the patent box concept and will guarantee that your claims are accurate.

Our team takes a holistic approach to R&D incentives, overlaying international incentives to give you a full picture of how these funding sources can help you achieve your goals.

Get in touch

If you would like to speak to one of our patent box experts to find out more about how we can help, please get in touch via the form below.