Patent boxes

What is the patent box incentive?

The patent box incentive is designed to reward innovative UK businesses for retaining IP in the UK. The scheme applies a reduced corporation tax rate to profits derived from the licencing of patents and sales of products incorporating patented technology, provided the claimant company was involved in the development of the patented technology, product or service. Eligible companies will pay a lower corporate tax rate of 10% on their patent box profits, compared to a future estimated corporation tax rate of 19% to 25% for more lucrative corporations.

Who is eligible to claim the patent box?

To be eligible, you must be a UK limited company that pays UK corporation tax. Furthermore, the corporation must have been involved in the development of an innovative product or process, have the right to a granted patent, and have made profits from the patented invention. Many companies are unaware of the development criteria and are constructed in such a way that they are unable to make a claim.

A UK company must have a patent awarded by the UK Intellectual Property Office, the European Patent Office, or designated EEA nations to be eligible for the patent box scheme. Design or copyrights cannot be claimed under this method, 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 licence to commercially utilise a patent.

The claimant company must make an election into the patent box system within two years after the end of the relevant accounting period in which relief is sought. A company can elect in 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 - the patent pending period. The accumulated relief is claimed in the year the patent is awarded on the tax return. After this point, the patent box scheme follows the normal corporation tax rules allowing amendments to be made up to two years after the end of the qualifying accounting period.

Patent box calculation

A multi-step calculation is necessary to determine the amount available for patent box relief. An additional deduction is claimed in the company's tax computation, resulting in a 10% effective tax rate on qualifying IP profits. Marketing profits and the value of the company's name are subtracted from the qualifying profits. Small and medium-sized businesses, on the other hand, may opt for a streamlined small profits calculation that avoids many of the transfer pricing difficulties. It's difficult to get this computation correct the first time, but we can help businesses set up their claims correctly. 

On 1 July 2016, the patent box rules were changed establishing a link between the patent for which relief is sought and the entity performing the R&D to produce and commercialise the IP. This Nexus fraction, as well as the necessity for IP earnings to be streamed, can be a stumbling block for newcomers to the plan, but we can help you manage these new requirements.

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

How we can help

Our R&D strategy service can assist you in developing a business plan for patent box and other incentives available in the UK and abroad, allowing you to get the most out of the support you receive over the life of your products. 

We can work with you to get the best possible tax savings by examining your current company structures and preparing to maximise your patent box savings. Our team takes a holistic approach to R&D incentives and can overlay international incentives to give you a full picture of how these funding sources might help you achieve your R&D goals.

The special incentives team at Buzzacott will assess the profits earned by patented products so they can be included in your patent box submission. Profits from patents that have been applied for but not yet awarded will be recorded. Our team is familiar with the intricacies of the patent box concept and will guarantee that your claims are accurate.

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.