Our approach to the Patent Box tax scheme
The Patent Box tax incentive scheme allows your company to pay a reduced corporation tax rate of 10% on profits that are earned from patented inventions or innovations.
WHO QUALIFIES?
1. Your company must be liable to corporation tax.
2. Your company owns or has exclusively licenced-in the patents. These patents must be granted by:
- The UK Intellectual Property Office.
- The European Patent Office.
- Select countries within the European Economic Area with similar Patent criteria.
3. Your company needs to make a profit from exploiting patented inventions.
4. Your company must have undertaken qualifying development on the patents. It must have made a significant contribution to either:
- The creation or development of the patented invention.
- A product incorporating the patented invention.
Profit steaming method
The Patent Box tax incentive scheme requires the calculation for the relevant profits to be done on a streaming basis, where a separate calculation or stream is completed for each patent. Where this is not possible, it is acceptable to stream by each product or product category that utilises patents. Therefore, your company would need to breakdown its income into a relevant IP income stream and a non-IP income stream. The IP income stream may need to be broken down into relevant IP income sub-streams.
R&D FRACTION
The tax benefit that can be received by your company is contingent on the proportion of R&D undertaken in respect of the patent or product on which the Patent Box benefits are being claimed. The R&D fraction is required to be applied to each IP stream and is based on in-house R&D expenditure and the level of expenditure on subcontracted R&D to third parties which is compared to the total R&D expenditure incurred and IP acquisition costs (if relevant). This fraction therefore becomes a connection between the creation of the IP and the claiming of benefits under the regime.
Further details around R&D Fractions can be found here
The patent box tax incentive scheme is designed to reduce corporation tax and is established within the UK Government’s legislation and has been established to offer a reduced corporation tax rate of 10% on the net profits that are attributed to patents. The scheme has been established with the aim of encouraging development of patentable technology within the UK. When this is applied, the scheme can present a significant tax saving against the normal Corporation Tax rate of 19% with further tax savings applied with the increase to the CT rate of 25% that was introduced 1st April 2023.
For those who are interested in filing for the Patent Box tax incentive scheme, there are several interesting points to raise regarding the benefit that can be provided:
1. They can be filed purely to gain a tax benefit and there is no requirement to enforce the patents against competitors.
2. As UK national patents attract low official fees, there is minimal cost associated with there filing which means it is a cheap way to qualify for the Patent Box without needing the patents to be filed in other countries.
3. The scope of the qualifying patent is only required to cover the specific products for which the Patent Box regime is to apply. As such, the scope can be narrow and, as a result, will be more likely to be granted.
4. A qualifying patent can also be directed to a minor feature that is part of the product being sold. It is also possible to redesign the product to facilitate the patented product’s inclusion.
5. The scheme can be applied to software-related inventions that are patentable in the UK or Europe so, depending on the nature of the invention, the Patent Box regime may be attractive to software companies.
6. Due to the complexity of the tax implications, specialist tax advice will be required so that the proportion of profits that qualify are correctly determined.
Profit steaming calculation
Step 1: Identify income streams.
The taxable income earned by the company will be apportioned into IP and non-IP income streams. The income stream related to IP itself is then divided into relevant IP income sub-streams.
Step 2: Split expenses between the income streams.
Business expenses are allocated between the non-IP steam and the relevant IP income streams on a just and reasonable basis with expenses not treated as deductible per the Patent Box rules.
Step 3: Calculation of net relevant IP income (RIPI) – this is step 2 subtracted from step 1.
Step 4: Deduction of the routine return.
This is calculated as 10% of the relevant routine expenses that have been included within the relevant IP income sub-streams which needs to be deducted from the result of step 3 to provide the qualifying residual profit (QRP).
Step 5: Application of the R&D fraction to each relevant IP income sub-stream.
The tax benefit is limited in accordance with the proportion of R&D undertaken by the claimant company in respect of the patent/product on which the Patent Box benefits are being claimed. To do this, an R&D fraction is applied to each IP asset’s patent box profits arising from the previous steps.
Step 6: Combine the profits from the above sub-streams to obtain the relevant IP profits of the trade. The above profits are effectively taxed at 10% within the company’s Corporation Tax return.