The R&D tax incentive regimes and the Patent Box are an important aspect of a company’s IP funding strategy as tax rebates or a reduction in corporation tax arising from successful claims enable companies to continue carrying out R&D and developing IP.
The Patent Box has been in place since April 2013, however some advisors and companies are unaware of it or fail to consider it. This lack of awareness is disappointing given that a claim can reduce the corporate tax payable on qualifying IP profits by almost 50%.
The Patent Box was introduced to provide financial encouragement to companies to continue innovation within the UK. The numbers of companies claiming the relief might lead some to conclude that the regime has not achieved its aim. The change in the rules by way of the introduction of the R&D nexus fraction in 2016 has not helped the number of claimants, however the Patent Box is very much alive and well and worthy of consideration.
Provided that a company satisfies the legal qualification requirements, renews its patents, profit is made each year on the patent and the company has elected into the regime, tax savings could be gained on profits earned for up to the 20-year patent lifespan.
The government has confirmed its commitment to the Patent Box post-Brexit by putting in place legislation (The Taxes (Amendments) (EU Exit) (No 2) Regulations 2019) which preserves the status of specific EU IP rights which amount to qualifying IP rights for the purposes of the Patent Box.
Brexit provides the ideal opportunity to go further and make the regime more attractive to UK companies in the future as the UK will no longer be shackled by EU constraints. The R&D
nexus fraction introduced in 2016 and heavily criticised for limiting the number of businesses able to claim the relief could be abolished and, in addition, an extension of the regime to new
IP rights could also be considered. At this juncture, it is useful to provide a reminder as to the current qualification criteria for the Patent Box to include reference to those IP rights which originate from the EU.
Qualification criteria for the UK Patent Box
• The business must be a UK registered company liable to corporation tax and either owning or holding an exclusive licence for qualifying IP
• Qualifying IP: Patent granted by the UK Intellectual Property Office (UK IPO), European Patent Office or by the national intellectual property office of designated country within EEA.
• A supplementary protection certificate issued under EU regulations for medicinal products and plant-protection products.
• Patent which would have been granted by the UK IPO but for issues of national security.
• Plant variety rights and EU Community plant variety rights.
• Marketing authorisations in respect of a product in accordance with EU legislation and the product benefits from marketing protection or data protection; and
• The company must have carried out qualifying development in relation to the IP right – created or significantly contributed towards the creation of the invention or performed a significant amount of activity for developing the invention or any item or process incorporating the invention.
There are separate rules for group companies and for companies involved in cost-sharing arrangements. As stated earlier, specific IP rights which derive from EU legislation are protected. The Taxes (Amendments) (EU Exit) (No 2) Regulations 2019 make it clear that EU IP rights will continue to qualify for Patent-Box purposes after the UK’s withdrawal from the EU. The part of the regulations which apply to EU IP rights come into effect on exit day.
The heads of IP income which qualify for relief are:
• Sales of products covered by patents or incorporating patents;
• Sales of spare parts where the main or primary purpose is incorporation within a patented product or product incorporating a patent;
• Sales of patent;
• Damages or compensation income;
• Licence and/or royalty income; and
• Increase in income arising from the exploitation, within the business, of a patented process or machine.
In order to claim, a company must have a granted IP right and must elect into the regime with HMRC for the accounting period. In the case of patents, it is possible to elect into the regime before the patent is granted in order to be able to take advantage of the pre-grant roll up provisions. The benefit will not be realised until a claim is made post patent grant, however, it is possible to claim relief on patent profits incurred for up to six years before the patent is granted, provided that a company has elected in for each accounting period.
Caroline Walton is a specialist tax consultant and heads the Patent Box service at Catax. She is a former practising solicitor and spent 18 years in private practice before joining Catax in November.
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