Patent Box

What is the Patent Box?
The Patent Box is a scheme which reduces the rate of UK Corporation Tax payable on profits derived from commercialising patented technology – the savings can be considerable, potentially reducing the effective Corporation Tax rate to as little as 10%.

The idea behind the scheme is to incentivise and reward UK-based innovative companies. The Patent Box goes hand in hand with R&D tax credits – companies can benefit from both schemes at the same time.

All companies that invest in R&D should consider whether they can make use of the Patent Box scheme.

Who can Benefit?
The Patent Box scheme is available to UK companies that:

• own or exclusively license a patent for an invention,
• have undertaken R&D (either in-house or outsourced) relating to the invention,
• derive revenue from commercialising the invention, and
• are liable for UK Corporation Tax.

A) Qualifying Patents
To qualify for the Patent Box, there must be a patent that is either (i) owned by or (ii) exclusively licensed to the company that is claiming the tax relief.

Patent Box is only available for technology covered by patents. Other forms of IP (such as copyright, design rights and trade marks) are not eligible for the Patent Box.

Patents are granted by patent offices following an examination process, during which a patent application is assessed against set criteria. While the relief can only be claimed once a patent has been granted, the benefit (i.e. the potential tax relief) can still be accrued while a patent application is pending.

Eligible patents are those granted by the UK Intellectual Property Office (UK IPO), or one of a list of institutions that use similar examination criteria (such as the European Patent Office or German Patent Office). A eligible patent in a single country (e.g. the UK) qualifies worldwide revenue derived from exploiting the patented technology for the Patent Box – there is no need to obtain patents in every country in which revenue is generated.

Patents can be obtained for innovations in all fields of technology, from cutting edge biotechnology and the latest high-tech electronics through to mature technologies such as packaging, consumer products and mechanical devices. The innovation need not necessarily be ground-breaking – small incremental improvements to existing products or processes are just as patentable (and therefore eligible for the Patent Box) as revolutionary ideas.

B) Research & Development
The Patent Box is designed to reward UK-based innovative companies and to encourage such companies to base themselves in the UK.

Therefore, to benefit from the Patent Box scheme, a company must (in addition to owning or exclusively licensing a patent) have carried out at least some of the R&D related to the invention. This R&D can include work to (i) create or develop the invention itself, (ii) develop ways in which the invention can be used or applied, or (iii) develop products or processes that incorporate the invention.

It is not necessary for the R&D work to be carried out in-house. If a UK company commissions an external company to carry out the R&D work, the UK company will still be able to benefit. It is also possible to buy in technology that requires further development. For example, if a UK company buys in, or exclusively licenses, a patented technology and carries out or commissions further development work to bring a product based on the patented technology to market, that further development work will allow the company to benefit from the Patent Box.

A company that buys in fully developed technology and does no R&D work themselves will not be able to benefit from the Patent Box scheme. UK distributors of patented products and IP holding companies based in the UK are therefore unlikely to be able to make use of the Patent Box.

C) Revenue from Commercialising the Invention
To qualify for the Patent Box scheme, revenue must be qualifying “IP-related profit” derived from exploiting the patented invention. This can include revenue from (i) sales of products that include a patented element, (ii) operating a patented process, and/or (iii) royalties received from licensing patented technology. There are no extra hurdles or tests on the merits of your innovation – if the revenue relates to patented technology, it is covered by the Patent Box.

Even if only a small part of a commercialised product is patented, the sales relating to the entire product can benefit from the Patent Box. Revenue relating to accessories and consumables designed to work with a patented product can also qualify. However, the revenue that qualifies as “IP-related profit” from using patented methods is limited compared to the revenue generated by sales of patented products. Abel + Imray attorneys can advise you on patenting strategies to help you to obtain as much benefit as possible from the Patent Box.

Revenue from selling or licensing patented technology also qualifies for the Patent Box. Therefore, companies (for example, engineering consultancies or start-up biotech companies) that only carry out development work and then pass on the resulting technology to others can also benefit.

In situations where multiple companies have contributed to the relevant R&D, a “nexus” fraction is used to apportion the qualifying profit between those companies that bore the costs in developing the patented technology.

In the simplest case when a UK company develops an improved product, patents the improvement and then commercialises the product itself, profits from sales of the product will be eligible for Patent Box relief. However, where the bulk of the R&D costs have been borne by third party or by another company in a group to that which now holds the patent, the nexus fraction can substantially reduce the benefit of the scheme.

D) Liability for UK Corporation Tax
The Patent Box enables a company to pay a reduced rate of UK Corporation Tax. Therefore, it is only of benefit to companies that are (i) based in the UK and (ii) making taxable profits. Early stage and start-up companies will not benefit from the scheme until they begin making profit. However, if a company believes that it may wish to utilise the Patent Box scheme in the future, it should consider applying for patents to enable them to benefit from the scheme at the point they become profitable.

Participating in the Patent Box Scheme
Entry into the Patent Box scheme is not automatic – a company must actively choose to participate by “electing in” to the scheme.

No tax relief can be claimed under the Patent Box scheme until the relevant patent has been granted. However, tax relief can be accrued (to be claimed once the patent is granted) for up to six years prior to grant, providing that the company had elected in to the scheme that year. It can therefore be worthwhile to elect in to the Patent Box scheme before a patent has been granted.

As the benefit of the Patent Box is a reduction in the effective rate of Corporation Tax paid, it is advisable to elect in to the scheme only when a company is making (or is about to make) profit consistently.

The timing of an election in to the Patent Box scheme is something that you should discuss with your accountant.

What’s the Catch? – The Small Print
The Patent Box scheme’s 10% headline Corporation Tax rate is very attractive. However, the scheme does make some deductions that can reduce the obtainable benefit (particularly for certain industries).

Firstly, the reduced Corporation Tax benefit provided by the Patent Box applies only to profits directly attributable to the patented technology, not to the company's overall income. It is necessary to identify what portion of a company’s income is attributable to exploiting patented inventions. Companies need to be able to divide their revenue into streams relating to (i) activities that are covered by patents and (ii) activities that are unrelated to patented activities.

The scheme also makes a deduction to remove “routine profit”, reflecting the fact that a business would be expected to earn some profit even if it had no access to patented technology. This deduction can be particularly significant for low margin products.

A further deduction is made to remove profit associated with marketing activities. If brand recognition plays a significant role in the success of a product, this deduction may reduce the benefit available from the Patent Box scheme.

When part of the R&D work has been carried out by a third party (for example, under contract from the company), the scheme applies the “nexus fraction” introduced above to reduce the available benefit accordingly. It is therefore important to keep track of R&D costs. The “nexus fraction” can be particularly significant for companies that have group structures in which different stages of product development are divided out between different entities. In some such cases (for example, when one company in a group does early-stage research, another does product development, another commercialises the finished product, and yet another holds the group IP), it may be that none of the relevant profits qualify for the Patent Box scheme.

It is therefore important to keep track of income and expenditure associated with R&D and patented technologies. Your accountant will be able to advise you on how best to do this and on what benefit you might gain from the Patent Box scheme.

Patenting Innovations – What is a Patentable Invention?
In order to be patentable an innovation must be novel and inventive.

An invention is novel if it is new – i.e. it has never been made public prior to the filing of a patent application. Once a technology has been sold, exhibited, described in a publication or on a website or otherwise disclosed in a non-confidential manner it can no longer be patented. However, any improvement, however minor, can be patentable, so even small changes to existing products can be patentable.

An invention is inventive if it is not obvious over what has gone before. This is a lower hurdle than you might expect – any change that provides an advantage or overcomes some technical issue is likely to be sufficient.

Whenever you consider a change to a product or process it is worthwhile to seek advice on whether the change could be protected by a patent before making any non-confidential disclosures . Abel + Imray attorneys can advise you on whether a change is potentially patentable.

Patenting Innovations – Cost Considerations
A common reason for a company to seek patent protection is to its innovations. A granted patent gives the holder legal rights (that can be enforced in court) to exclude others from using the patented invention. The existence of a patent (or even just a patent application) can also deter competitors from attempting to copy your innovations and proprietary technology.

Obtaining broad patent rights throughout the world to protect innovations in this way can be a costly business. By contrast, if you are seeking a patent only to benefit from the Patent Box scheme, then it can be possible to obtain a narrow patent to enable use of the Patent Box scheme relatively inexpensively.

The cost of obtaining a “targeted” UK patent sufficient for Patent Box purposes can be in the region of £10,000 to £15,000. A granted patent can be maintained for 20 years, during all of which time it can be used to claim Patent Box tax relief. Thus, a relatively modest investment today can provide a substantial reduction in corporation tax for many years.

At Abel + Imray we are experienced in drafting patents and applying patenting strategies to enable you to make the best use of the Patent Box scheme in a cost-effective manner.

For those seeking certainty on costs, Abel + Imray also offers a fixed price service for obtaining a “targeted” granted UK patent for Patent Box purposes. The fixed price, decided at the outset, will be in the range of £12,000 to £18,000 (ex-VAT), with an initial payment of 60% and then four subsequent annual payments of 10% of the fixed price.

Contact Us
If your company invests in R&D and you are not yet making use of the Patent Box scheme, you may be missing out on substantial tax savings. Speak to Abel + Imray for advice on how the Patent Box scheme could benefit your business.

Please contact bd@abelimray.com or your usual Abel + Imray contact to discuss further.