How The Patent Box Can Reduce Your Corporation Tax
What is the Patent Box?
Introduced in 2013, the Patent Box is a generous tax incentive designed to encourage innovation in the UK. The scheme is also referred to as the intellectual property box regime (IP box) or innovation box. Broadly, it offers further deductions in taxable profits, with intellectual property profits taxed at a reduced corporation tax rate of 10%.
Recently, some changes have been made to the scheme, namely to add a link between the patent on which relief is being claimed and the company carrying out the R&D. Additional administrative requirements in calculating the relief available were also introduced.
Corporation Tax
All limited companies have to pay Corporation Tax on profits generated from business activity. The main rate applicable to most businesses is 19%. The Patent Box reduced this rate of Corporation Tax from patented inventions to a rate of 10%.
Are you eligible?
According to the government, you can only use the Patent Box if your company:
- is liable for Corporation Tax
- makes a profit from exploiting patented inventions
- owns or has exclusively licenced-in the patents
- has undertaken qualifying development on the patents
Patents can only qualify if they are approved by the UK Intellectual Property Office, the European Patent Office, or specific EEA countries.
A development condition must also be met. Under the new regime, the company claiming relief will need to be sufficiently involved in the development/innovation of the qualifying IP rights or products incorporating the patented invention.
What income qualifies for reduced Corporation Tax?
Reduced Corporation Tax only affects income generated from patented inventions. Not all company profits qualify. Intellectual Property income refers to the income relevant to the Patent Box and must come in the form of the following:
- the sale of patented products
- licensing out patent rights
- selling patented rights
- income from patent infringement
- Insurance or compensation income relating to patent rights
Any income generated from these sources is charged at a reduced rate of Corporation Tax at 10%.
How to claim
You have to make an election to benefit from the reduced rate of Corporation Tax that applies to the Patent Box. This must be done within 2 years after the end of the accounting period in which the relevant profits and income arose. You can make an election in the computations accompanying your Company Tax Return, or separately in writing.
Authors: Oliver Murphy & Sacha Bright
Disclaimer
NextFin is not a qualified accountant or an Intellectual Property lawyer, and should seek independent legal advice. The information in this article is correct to the best of our knowledge at the time of publishing. You should not rely solely on the information within this guide and should conduct your own research before proceeding.
