Patent box – still a powerful tool in driving R&D

Gemma Brindley, Corporate Tax Director in the Cheltenham office of national audit, tax, advisory and risk firm, Crowe, says that the Patent Box regime is still a very generous tax relief for qualifying companies involved in Research and Development (R&D).

The Patent Box regime is a tax incentive which enables companies to apply a lower rate of corporation tax to profits earned after April 1,2013 from its patented inventions.

While the Patent Box system saw changes made from July 1, 2016, it is important to stress that Patent Box remains a very generous tax relief alongside R&D.

The changes effectively made it a requirement for companies to demonstrate that they are actively doing something with their patents (i.e. R&D). Before 2016, it was sufficient to show that you had qualifying patents or IP, but since the 2016 changes, it has become a necessity to show that your R&D is active.

The most recent HMRC statistics show that, while manufacturing claimed the lion’s share of Patent Box relief (more than 50 per cent), second was a category called “Wholesale & Retail Trade, Repairs” at 18 per cent.

Other sectors qualify and your business may be eligible to apply.

To check if you qualify, you need to consider whether your UK company owns, or has an exclusive right to exploit, a patent granted by the UK Intellectual Patent Office, the European Patent Office or one of the 13 accredited European jurisdictions. This needs to be checked carefully as not all European countries are accredited jurisdictions – interestingly France and Italy are not.

In addition, your UK company, or a group company if it is part of a wider group, needs to have been actively involved in developing the relevant Intellectual Property (IP) that has been patented. This may include R&D. One other factor to consider is which company has undertaken the R&D.

If the relevant R&D has been undertaken by a group company, other than the company that owns the IP, then you may need to consider a slight restructure of the business or consider putting a formal licence in place.

The changes introduced in 2016 added a layer of complexity to an already complex system. However, in 2015-16, 1,160 companies claimed relief under Patent Box with a total value of £754.3 million. In 2016-17, 1,025 companies claimed £942.5 million in relief.

A company may choose to elect into Patent Box for profits earned in a particular accounting period within two years of the end of that period. If a company elects into the regime, the profits generated from its patents will be subject to the Patent Box regime. If a company opts to elect out of the Patent Box regime, it is barred from re-entering for five years.

It is important to work hand in hand with your tax adviser and your patent agent, if using one, as everyone involved in both the application process and claiming under Patent Box needs to be aware of the steps taken and where you are in the process.

If your business is involved in research and development, and you want to find out if you qualify for Patent Box, ensure you have specialist advisers on board to make a complex process as pain-free as possible.

If you are thinking of registering a patent, consider how long the process will take. The full process usually takes around two and a half years to complete, but it could realistically take anywhere between one to four years.

The most important step is to file the initial application. From that point, no one else can apply for a patent covering your invention. You then have 12 months to decide whether to take the application forward.

If you proceed and are granted a full patent, this can be maintained for up to 20 years from the initial filing date.

Patent Box enables UK companies to apply a lower rate of corporation tax of 10 per cent to profits earned after April 1, 2013 from their patented inventions and other qualifying IP. This compares to the current rate of 19 per cent, which will drop to 17 per cent from April 1, 2020.