By Nigel Holmes, Senior Tax Specialist at Catax
The Patent Box, like R&D tax relief, is a very much underclaimed relief. In 2014-15 only 1,135 claims were made, although this resulted in claims valued at £651.9m. 94% of this value was claimed by large companies even though such companies only accounted for a quarter of the claims made.
So, what is Patent Box?
As R&D tax relief is enhanced to encourage scientific and technological innovation based on costs incurred, Patent Box is a tax relief for profits made from scientific and technological innovation, whether that be a product or a process.
The headline is that it is a 10% corporation tax rate on patented profits (current normal rate being 19%). Although in fact this is not exactly true; it gives rise to an effective 10% rate by adjusting the amount being taxed at the normal rate by an amount calculated through a series of complex steps.
So why is it under-claimed?
Firstly, it is complicated. It is complex to explain, and complex to calculate.
Secondly, it was phased in from 2013 and was only available in full from April 2017, perhaps putting off some claimants.
Thirdly, it is only of use to profitable companies. Many innovative companies are loss making in their early stages.
Fourthly, quite often a patent is applied for in the inventor’s personal name rather than that of the company. This can be rectified through a licence or a sale of the patent after taking legal and tax advice.
Finally, as with R&D tax relief, there is a lack of awareness.
It is, like R&D tax relief, only available to companies. It applies to companies exploiting a UK or EU patent, or a patent granted by certain members of the EEA, whether that patent be for a product or a process. Indeed, it can apply to a sale of an entire product as long as that product requires a component, that is patented, to operate. The company either needs to own the patent or have an exclusive licence to exploit it. It does not apply to other intellectual property such as copyright or trademarks.
Some companies avoid applying for a patent due to cost and timescales. However, the Patent Box savings should more than cover the cost and the relief that would be available during the patent pending period is rolled up and given once the patent is granted (up to six years’ worth).
The calculation is complex and requires income and costs to be streamed into patented product or process streams (for each patent) and a non-patent stream. Thereafter adjustments are made for routine and marketing returns and various other steps, before finally reaching an amount to be deducted from taxable profit.
Of course, most companies with patents will also be carrying out R&D so such companies carry a double opportunity.
So whilst it is complex, as always Catax deal with this for our clients, the most challenging part is trying to explain it!