Patent Box tax relief can reduce corporation tax

With the increase in corporation tax and evidence that companies already taking advantage of Patent Box relief hold an average of 10% more assets than companies who don’t, it’s essential that innovative companies maximise their relief.

 

Patent attorney Elizabeth Mills outlines how the scheme works, the nature of a ‘qualifying IP right’ and a ‘qualifying company’.

 

What is Patent Box?

Patent box is a tax relief scheme that aims to encourage companies to commercialise patented technology in the UK. It seeks to do this by allowing companies to apply a lower rate of Corporation Tax to profits earned from inventions patented in certain jurisdictions. This lower rate of Corporation Tax means that only 10% of Corporation Tax is paid on qualifying profits, instead of the current standard Corporation Tax rate of 25%. Patent Box was introduced as a new Part 9A in the Corporation Tax Act 2010.

 

Guidance issued on patent box may be found on the Government’s website. Some aspects of this Guidance are highlighted below. In particular, the following touches on issues relating to:

• Qualifying IP rights
• Qualifying Company
• Patent Box Accounting

 

Qualifying IP right

In order to be allowed to claim relief under patent box, a claiming company must generally have, during the relevant accounting period, held or “actively” managed a “qualifying IP right” or an exclusive licence in respect of such a qualifying IP right. These are discussed further below.

 

A qualifying IP right includes any patent granted by a patent office within a designated jurisdiction for which the claiming company fulfils the “qualifying development test”. The patent offices of the designated jurisdictions include the UK Intellectual Property Office, the European Patent Office, and patent offices of specified European Economic Area states.

 

In general, the qualifying development test may be considered to be a test for identifying contributions made by the claiming company (or by another company within a group of companies that includes the claiming company) for obtaining the IP right. The qualifying development test identifies whether such a company has made a significant contribution to either:

• the creation or development of the patented invention, or
• a product incorporating the patented invention.

 

The creation or development of the patented invention may be evidenced in at least one of a plurality of different ways. For example, criteria for identifying a significant contribution may include criteria relating to at least one of: the identification of a technical solution to a technical problem, testing and/or enhancement of the technical solution, the development of a new use for an existing item, the impact of the technical solution, and/or the costs, time, and/or effort incurred in identifying and/or developing the technical solution.

 

What is considered a qualifying development may also be affected by whether a claiming company enters or leaves a group of companies holding ownership of the claiming company.

 

Although this qualifying development test will not be generally satisfied if a company merely acquires or exclusively licenses a patent from another company, the development test may be satisfied when a company has undertaken their own Research and Development (R&D) into the technology claimed by such a patent. For example, when a company has later discovered that their technical solution to a technical problem is already the subject of another companies’ patent, and subsequently acquires and/or exclusively licenses that companies’ patent, the acquired and/or exclusively licensed patent may be considered as a qualifying IP right as a result of the company’s own research and development spending.

 

Active management relates to the administration of a patent fulfilling the qualifying development test for a company within a group of companies comprising both companies. The active management must be considered significant in relation to a number of different factors, including, for example, the company’s size and resources, the impact of their decisions relative to decisions made by other companies in the group, and whether the invention of the patent is currently being exploited. 

 

Qualifying company

In order to successfully claim tax relief under patent box, a company must:

1. be subject to UK Corporation Tax in order to claim the reduction in Corporation Tax;
2. either perform actions fulfilling the qualifying development test or actively manage a patent whose subject-matter fulfils the qualifying development test, as mentioned above; and
3. explicitly elect into Patent box.

 

Patent Box Accounting

Tax relief for Patent box is applied in respect of Corporation Tax paid on profits attributable to qualifying patents, whether received as royalties or as direct sales. Although previously discretionary, it is now mandatory to separate these profits into different streams when claiming Patent Box tax relief. This process of separating profits is referred to as streaming.

 

Streaming relates to portioning R&D spending and income into different streams to reflect what proportion of these costs and income relate to different products or processes of different qualifying IP rights.

 

Streaming may be performed in a plurality of different ways, depending on how the costs and incomes are recorded and whether the patent(s) are generated wholly in-house or are subsequently acquired from another company. For example, the costs and incomes may be streamed either using IP-based streams (e.g., with each stream being based on a respective qualifying IP right), or by product-based substreams (with each product-based substream relating to a respective product associated with at least one respective qualifying IP rights).

 

A company does not need to make a Patent Box claim in relation to an entire accounting period. Indeed, there are specific provisions for companies for profit relating to qualifying IP rights that are brought into account in an accounting period after a qualifying right has expired or are otherwise no longer held by the company (e.g., following an infringement action), and for companies for profit relating to qualifying IP rights acquired part way through an accounting period.

 

Further, provided the patent box claim was made in good faith, no retrospective withdrawal of those benefits will be applied if it is later determined that the tax relief should no longer be applied. An example of when such a situation may occur includes when a product originally comprising a qualifying IP right is developed over time such that the product no longer comprises the qualifying IP right, and while renewal fees are still being paid for the qualifying IP right. This is reflected in the UK Government’s Guidance notes, which states that “Where a company has claimed Patent Box benefit on the basis of a reasonable but mistaken belief that an item qualifies, there will be no retrospective withdrawal of those benefits, but no further claims can be made from the point at which it became reasonably apparent that the belief was mistaken.”

 

 

We can help

Please get in touch for further information about protecting innovation by way of patent.

 

We recommend contacting a specialist tax advisor if you have any questions regarding qualifying and applying for tax relief under Patent Box.

 

This briefing is for general information purposes only and should not be used as a substitute for legal advice relating to your particular circumstances. We can discuss specific issues and facts on an individual basis. Please note that the law may have changed since the day this was first published in April 2023.