Patent Box: inventing a way to reduce corporate tax

Most companies would like to invent a way to reduce their corporate tax. The UK Patent Box program does just that by offering a reduced corporate tax rate of 10% for profits derived from patented inventions. This tax saving through innovation is actively encouraged by the UK government, so it makes sense to try and take advantage of it.

For innovative companies that make substantial profits from patented products and services (or patent licenses), the tax reductions currently available under the Patent Box can make a huge contribution to offsetting the costs of R&D (and the savings often eclipse the cost of obtaining the patents that qualify them for this tax cut).

In March 2021, the UK government announced a plan to raise corporation tax by 6%, from 19% to 25%, with no corresponding increase in the 10% reduced “patent box rate”. This means that the benefit of the Patent Box will be even greater if corporation tax rises in 2023 as planned, and the 6% rise was repeated in the UK government’s October 2021 budget.

Why pay corporation tax at 25% on all your profits when the government encourages innovative UK companies to pay just 10% on at least some?

What is the UK Patent Box?

In the UK, the Patent Box incentive was first introduced in 2013 to encourage innovative companies to develop, retain and commercialize intellectual property in the UK. A UK-based company that has elected in the Patent Box may apply a reduced corporate tax rate of 10% to profits derived from patented inventions. Currently, this represents a 9% reduction in the tax rate, but if the tax rate increases by 6% in 2023, it will result in a 15% reduction, which will more than halve the tax payable on eligible profits.

The system got a little more complex in 2016, but the significant tax savings justify navigating the complexities.

We hope you find the summary below helpful, but we always suggest that you seek advice from specialist tax advisers before making any election or claim under the Patent Box. We can help you obtain the patents eligible for the scheme and introduce you to tax advisors who are experts in the Patent Box and R&D tax credits.

Who can benefit from the Patent Box?

To qualify, a business must be a eligible business who has elected in the patent box.

A eligible business is a UK based company:

• the holder of a eligible intellectual property (IP) rightt; or
• holder of an exclusive license for a eligible intellectual property right (under certain conditions).

If the company is a member of a group, it can still qualify if it owns the patented invention and play an important role in the management of the portfolio of eligible patents

A eligible intellectual property right must be in effect and will generally be:

• a patent issued by the UK Intellectual Property Office (UKIPO) or the European Patent Office (EPO); or
• a patent issued by the National Patent Office of: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia or Sweden.

Certain other rights may also be eligible, including Supplementary Protection Certificates (SPCs) issued by the UKIPO or EPO, UK or EU breeders’ or plant breeders’ rights and data exclusivity rights.

Note that the patent apps are do not eligible intellectual property rights. However, when a patent application is granted, it may become a qualifying intellectual property right and the patent class tax reduction may be applied retrospectively to profits made in accounting periods up to six years before issuance, provided that the company elected in the Patent Box for these accounting periods.

The company (or another group company) must also have undertaken the development of the patent and have made a significant contribution either:

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

Election in the Patent Box

Entry into the Patent Box is not automatic, a company must elect in the patent box. An election can be made by writing to the tax office and there is no prescribed wording or form to complete. For particular profits to benefit, the election must be made within 2 years of the end of the accounting period in which the relevant profit and income was generated.

Which profits are eligible for the reduced tax rate?

The Patent Box benefit may apply to worldwide earnings, even if the relevant patent(s) only exist in the UK (or certain EEA countries). The reduced tax rate may apply to profit from the sale of a product incorporating a patented feature, even where the patented feature is itself only a minor part of the product. This means that the benefits of a full line of products that each incorporate a particular patented component can be included in the Patent Box.

As a result, a single UK patent may be sufficient for all worldwide profits generated by a particular product to benefit from the Patent Box, even if the profits come from sales in countries where no patent is held.

In summary, the reduced tax rate can be applied to profits from:

• worldwide sales of products and services incorporating the patented invention, including custom replacement parts;
• the use of the patented invention in the company’s business (the relevant profits in this case are calculated on the basis of a notional royalty);
• worldwide licensing or sale of qualifying intellectual property rights; and,
• compensation payments awarded by the court for breach, such as damages or an account of profits allegedly made, and insurance proceeds.

Government guidelines

Official government guidelines on how to use the Patent Box to reduce your corporation tax on profits can be found here.

What does this mean for IP strategy and how can AA Thornton help you?

The potential savings offered by the Patent Box may well shift the results of a cost-benefit analysis for many UK businesses in favor of seeking patent protection for innovations that would otherwise not warrant such protection.

Inventions that previously would have been kept confidential (eg as trade secrets) may now warrant patent protection due to the savings made by the Patent Box over the life of a patent. This, of course, must be weighed against the fact that all patent applications are published 18 months after filing, which means that the details of the invention are made public.

Inventions whose potential scope of patent protection is likely to be so narrow that they would not previously have justified the cost of seeking patent protection may now merit further consideration. Although it may be easy for a third party to circumvent the patent and thus provides only minimal practical commercial protection for the invention, if the patent covers a product or service it may still provide value. significant business through tax savings.