JS. Tax Advisory
Patent Box Tax Relief
Patent Box Tax Relief enables UK companies liable to Corporation Tax to pay an effective rate of tax of 10% on applicable intellectual property (IP) profits. As Corporation Tax rates are high (25%). Its important profitable businesses consider the merits of this relief even when factoring in time/costs of making a claim, as the benefits can be significant.
Eligibility Criteria
To qualify for Patent Box Tax Relief, a company must:
✔ Be liable for UK Corporation Tax
✔ Own or exclusively licence a UK patent
✔ Generate taxable profit from exploiting a patented invention
✔ Meet the qualifying development condition
What Income Can Qualify?
Patent Box Tax Relief applies to profits arising from various income streams, including:
- Sales of patented products, including those incorporating patented components or technology.
- Sales of bespoke spare parts linked to patented equipment.
- Licensing of patent rights.
- Sale of patent rights.
- Infringement income or damages received.
- Insurance or compensation payments related to patented technology.
Additionally, businesses may benefit from a lesser known ‘notional royalty’ mechanism, allowing them to apply Patent Box Tax Relief to profits arising from efficiency gains or increased outputs due to patented processes or technologies.
Key Benefits of Patent Box Tax Relief
- Reduces Corporation Tax on qualifying profits to 10%.
- Up to six years of tax relief can be claimed for profits accrued while a patent application was pending.
- Can be claimed for the entire lifetime of a patent.
- Can be claimed alongside R&D tax credits.
Applicable Income Streams
Patent Box Tax Relief applies to profits from:
- Sales of patented products or software.
- Sales of larger products incorporating patented components.
- Sales of spare parts for patented products.
- Use of a patented method or process.
- Licensing income from patents.
Election Timing Considerations
To avoid losing valuable tax relief, Companies must elect into the scheme within two years after the end of the accounting period. However, it is crucial to review the IP profits before making an election, as once elected in all relevant IP income is subject to the Patent Box rules, even if it results in a Patent Box loss.
Patent Box losses occur if your company isn’t yet generating sufficient IP profits, (often due to low margins or early commercialisation) These losses must be either carried forward to offset against future Patent Box profits or offset against group Patent Box profits, thus delaying or reducing the benefit of the 10% Corporation tax rate.
The company can opt out of the regime at any time; however, to prevent companies from hopping in and out to cherry-pick profitable years, once opted out, the company can’t re-enter the regime for 5 years.
Streaming of Income and Expenditure
Streaming income and expenditure is critical for Patent Box Tax Relief, ensuring that only profits directly linked to patented inventions benefit from the 10% Corporation Tax rate. Effective streaming optimises deductions and strengthens a company’s ability to fully benefit from the Patent Box scheme whilst maintaining accurate financial reporting. This involves:
- Identifying Relevant IP Income (RIPI).
- Allocating proportional expenses to patent-related income streams.
- Applying the Patent Box deduction to determine net profit from patented products or processes.
Complexity of Calculations
Patent Box Tax Relief calculations can be intricate and complex, requiring professional support to ensure compliance and maximise tax relief benefits. Advanced tax planning in respect of Patent Box Tax Relief is essential. JS can assist in:
- Developing an innovative tax strategy.
- Preparing and submitting Patent Box claims, ensuring maximum relief.
- Connecting you with a strong patent attorney (if required).