With Corporation Tax now at 25%, this relief is now more popular than ever, but how does it work and does it make the costs of obtaining patents worthwhile?
Patent Box is a tax relief designed to encourage UK based companies that develop new technologies to remain in the UK to exploit and commercialise them.
The broad headline here is the ability to pay an effective rate of Corporation Tax of 10% on relevant profits derived from a qualifying patent. The calculations are a lot more complex than that, but this is a useful rule of thumb to work out roughly how much a company could save.
Until April 2023, Corporation Tax was at a rate of 19%, but with the increase now to 25% for all but the smallest companies, this has meant that the differential in rates under Patent Box has increased by more than 50%. In recent months, we have had more Patent Box enquiries and new work in this area than we have ever had before, and this increase in value of the relief is likely to be the reason.
Many small businesses in the past have decided against applying for patents to protect their innovations, usually on grounds of the costs and red tape involved. The simplest of patents probably costs at least £5,000 plus VAT for a patent attorney to complete the work – much higher where multiple jurisdictions are being applied for.
Some key points of the relief to bear in mind are:
- Any profits derived from the patent can be included in the relief. This includes not just sales of a patented item itself, but if the patent forms a vital component of a much larger sale, the whole sale is potentially eligible.
- To qualify for relief, the patents must include a UK or European patent.
- Relief cannot be claimed until the year the patent is granted, but sales during a “patent pending” period are eligible – relief must be calculated for these years but is then given in the year of grant.
- A company must elect into the Patent Box by two years from the end of an accounting period – even if the patent is not granted by that stage.
- As well as sales of patented products or components, qualifying profits include those from licensing out the patented technology to other businesses, and profits on selling the patent itself.
Complexities in the rules mean it is important to elect in at the right time, so early discussion with an experienced tax professional is crucial to make sure you are adopting the most beneficial approach and don’t miss out on any qualifying years.
It’s also beneficial to make sure that your accounting systems are geared up to report effectively on qualifying and non-qualifying profit streams, as this makes the calculation process a lot easier and credible for HMRC when the time to claim comes around.
Contact James Geary for more information by emailing james.geary@randall-payne.co.uk or call 01242 776000.
