How can my company benefit from the Patent Box tax regime?

The patent box regime came into effect from 1 April 2013 and is one of the schemes heralded by the Government to make the UK a haven for innovation .  The full scheme will be phased in over the next three years and will ultimately result in any income generated from patents being taxed at just 10% from 1 April 2017.

In order to benefit from Patent Box your company needs to:

  1. Have a patent: it must own or have exclusive license for patents granted by UK Intellectual Property Office, the European Patent Office or in certain other countries within the EEA

  1. Have developed the patent or be part of a group of companies within which the patent has been developed

  1. Make a profit and so be liable to Corporation Tax as well as making profits from exploiting patented inventions.

Obviously for many tech startups though the above points are not applicable as they do not hold patents or currently don’t derive profits from them.  In reality it has been seen that the early adopters of patent box are the larger multinational tech companies with significant numbers of patents already in place which already make substantial profits.

However this shouldn’t dissuade smaller tech companies or start-ups from considering patent box or bearing it in mind for the future.

Due to the phasing in of the tax benefit over the next few years in practice you do need to be generating significant profits from patents in order to make this a worthwhile opportunity currently, however we believe we will see more and more smaller tech companies adopt the scheme over the coming years once the tax rate is reduced and the benefits are more easily seen.  From April 2014 the effective tax rate for Patent Box profits will be 13.3% as opposed to the main full rate of 21% so there are already significant tax savings opportunities.  The increased interest in businesses looking to obtain patents in the future will also hopefully result in the cost of obtaining such patents reducing over the coming years.

With obtaining a patent there are obviously important commercial and legal considerations that will come with registration and you need to involve an IP lawyer early in the process.

Some companies are concerned that obtaining a patent makes what you have patented “public”.  The technology does indeed become visible and on public record and so there could be a potential risk of copy.  This must be taken into consideration and obviously the commercial business aspects of whether or not to obtain a patent should not be overshadowed by the potential reduced tax rate.

However if there are concerns over making the technology public by registering a patent then under patent box currently its actually possible to patent an element or “part” of a total innovation which will then make all the income generated from the whole innovation fall under the patent box regime and so taxable at a reduced rate.

It is worth noting that any Patent Box losses stay within the regime for use against future Patent Box profits only but can be used in a group-wide context for relief. This may dictate the time at which you make the election. There is also the opportunity to use the 6 year “look-back” period whereby any profits from the patented product in the 6 years prior to the patent being granted (but not beyond 1 April 2013) can enter the Patent Box.

Where a company has elected into the patent box regime their IP will stay within the patent box until the election is revoked. The company will not be able to then re-enter the regime for 5 years. These rules are designed to prevent companies from abusing the Patent Box rules by hopping in and out of the scheme depending on whether losses or profits arise.