By Nigel Holmes, Head of R&D Technical Operations at Catax.
As we are well aware, the take up of the Patent Box tax relief remains extremely low, with just over 1,000 claims per year.
Firstly, as a reminder, the Patent Box is a Corporation Tax relief that reduces profits derived from a patented product or process to an effective 10% tax rate compared to the current 19%. That’s nearly halving the rate of tax! Yet there are still so few claimants, let us look at why:
Its complexity
Undoubtedly the calculations, definitions and the complex potential situations and possibilities make this relief seem off-putting. Having said that, many actual claims are not as complex as they first seem and by using Catax we will sift through all the parts of the calculations that are not relevant to each particular case and produce the complex calculations for each client, merely by the client providing accounts and some additional accounting and tax information.
Loss-making companies
It is presumed that as this relief lowers a tax liability, then a claim to Patent Box should be ignored for loss-making companies. Whilst companies generating a loss from their patent income would be advised not to elect into the regime, companies with patent profits yet a loss overall would still benefit as it increases the tax loss available to be offset elsewhere. Hence crunching the numbers and good advice is essential.
It isn’t as generous as a 10% tax rate
For a period of four years, the relief was phased in, so early claimants did not see the full benefit of the relief and perhaps felt the tax saved did not justify the effort. However, the relief is now fully in situ, so this is no longer an issue. Furthermore, Catax base their fees on a contingent basis, so our charges are always in proportion to the saving made.
The wrong name!
This causes a particular issue where expert advice is not sought, and the patent is placed in the individual’s name as opposed to the company that undertook the development and is exploiting the patent. Whilst a sale or licence of the patent will resolve this, it does lead to additional legal costs and potential income tax implications. Getting good advice at the outset is crucial.
So that covers those who already have patents, but what about companies who have undertaken R&D (and hopefully maximised their R&D tax relief claim using Catax) yet don’t patent due to the cost and the time it takes. These companies are missing out not only on nearly halving their tax bill (recouping the patent costs many times over) from when the patent is granted, but also the relief that would have been available whilst the patent is pending needs to be calculated and rolled up to be given in the accounting period that the patent is granted (hence the time taken becomes less relevant too). Once again, expert advice is essential. A good patent attorney will be able to advise a company how best to apply for a patent if the main reason is for tax savings as opposed to Intellectual Property protection.
This is only an overview of a complex topic. Expert advice should be sought for each individual Patent Box circumstance.
If you have any questions on this blog, why not contact us?