By Jon Sutcliffe, Kingston Smith
In simple terms, the Patent Box is a regime that provides a reduced rate for corporation tax on profits derived from the exploitation of patents.
It is quite a complex regime, however, and qualifying for it has many various requirements. Furthermore, it applies to a number of different scenarios which include patents and products, so careful consideration must be taken to ensure companies benefit from it.
We recently did a Q&A with our Senior Tax Specialist, Michael Haig, to find out more about the Patent Box and how it really applies to businesses:
To benefit from the regime, the business must be an incorporated company with qualifying patents, granted by the UK Intellectual Property Office (IPO), the European Patent Office (EPO) or a number of other national patent offices throughout the European Economic Area (EEA).
The company must also own or have a territorially exclusive license for the patents and must have undertaken qualifying development on the patent or a product incorporating the patent.
Companies may also benefit from the Patent Box regime if they use a process that is patented or provide services using a patented tool. In this circumstance, calculations must be based on a notional royalty for the use of the patent. This can significantly reduce the income from the patent qualifying for the Patent Box. Some would say this is unfair to those creating a patented process rather than product, but this is how the legislation is set out.
No, there is no obligation on companies who hold a patent to join the Patent Box — it is voluntary and should be looked at carefully before making a claim.
You can also, however, elect into the regime if you don’t currently have a granted patent but have applied for a patent and are waiting for approval. Once the patent is granted, profits derived from the product will be retrospectively included in the ultimate Patent Box calculations.~
This must be a considered, long-term choice as, should you wish to leave the Patent Box voluntarily, you aren’t allowed back in for another 5 years. However, given you can elect into the regime up to 2 years after profits are earned, there is little reason not to have a clear view of your financial status and whether to elect in or not.
This is a tricky one to answer, only because of the variety of applicable and relevant sectors.
Manufacturing, for example, is a particularly mature industry and, in very general terms, companies in this space are more commercially aware of the need for detailed, accurate reporting on these types of measures. As a result, we often find that these firms are equipped to provide information with a good level of speed and accuracy, with fewer issues around obtaining the required data.
Technology, on the other hand and in similarly general terms, is a sector with a very broad range of experience; particularly with the amount of startups who might qualify for the regime. Often these companies are surprised when they start to turn a profit, so it can come as something of a challenge for them when they suddenly need to report on the various income streams in the detail required for this regime.
TOP TIP: make sure at an early stage, that you are keeping documented accounts with some understanding of what applies to any patents you may hold. This is all important to making the process as manageable as possible when the time comes to submit a claim.
Yes, there are a number of other countries who have similar regimes — the Netherlands have one. Luxembourg and Belgium also have comparable schemes, as well as the likes of Spain, Switzerland, Ireland, Hungary and France.
The parameters of each are all different but the purpose is the same — to reward innovation and development of new patents within the EEA.
It may be too early for the owner-managed businesses that we generally deal with, although a similar situation occurred with the R&D tax credits when they were announced back in the early 2000s. At the time, the government did a lot of work to encourage take up and so over the next few years we may see more of this relating to the Patent Box.
Insofar as businesses setting up or registering patents in the UK, there have been many reports of foreign companies registering patents with the IPO.
In 2013, the number of patents filed in Britain by US firms rose by 26 per cent while Japanese companies asked for 19 per cent more patents. German pharmaceuticals firms and other research and development businesses filed 27 per cent more patents last year than the previous 12 months.
This is very indicative that the regime is gaining traction globally and should mean good things for UK innovation over the coming years.