By Caroline Walton, Head of Innovation Reliefs
In 2018 I was responsible for leading a Patent Box department at a tax consultancy firm. I was having a lot of conversations with company owners and patent attorneys about the Patent Box.
This included a director claiming that the Patent Box had been abolished in 2016. Although this was an extreme example, it illustrated a trend for companies to be unaware of the Patent Box and its benefits.
Patent attorneys had originally expected the Patent Box to be popular when it was introduced on 1 April 2013, with it leading to a large number of claims and, potentially, encouraging companies to apply for Patents. This did not transpire.
Patent Box claims have remained small in comparison to R&D claims; in 2017/18, just 1,305 Patent Box claims were made, compared to over 50,000 R&D claims under the small and medium sized entity scheme. The number of patent applications has also in fact reduced following the introduction of the Patent Box.
Part of the problem lies with the complexity of the Patent Box scheme, with this potentially deterring advisers from recommending the relief to their clients .To be able to advise fully on the availability and value of Patent Box relief requires an understanding of intellectual property rights and transfer pricing. Such a combination of skills is usually confined to advisers working within the treasury functions of large corporates.
The way in which the Patent Box was introduced has also potentially hindered the take-up by companies. Firstly, the relief was phased in, so that ony 60% of the benefit was available to businesses in 2013/14. This increased by 10% each tax year, with the full benefit only becoming available from 1 April 2017. Secondly, the rules were changed in 2016, so that the relief is only available where there is a ‘nexus’ between the receipt of qualifying income and the carrying on of R&D. These rules were introduced with ‘grandfathering’ provisions which allowed existing claimants to continue to claim under the new rules until 1 July 2021. All claimants are now required to apply the revised ‘modified nexus rules’, further adding to the complexity of the relief.
However, despite these difficulties, the potential benefits of a Patent Box claim are substantial, and so, for a company with valuable IP, it is well worth considering a claim.
How do I qualify for Patent Box Tax Relief?/Who can claim?
The Patent Box is a corporate tax relief and is open to any UK company liable to pay corporation tax where;
- It either owns or exclusively licences qualifying IP; and
- It has received qualifying IP income.
The relief is only available where a qualifying intellectual property right has been granted, rather than being within the ‘pending scheme’. Companies must also elect into the scheme – either through their tax returns or in writing. Such elections need to be made within two years of the end of an accounting priod of a claim. Once a company has elected in, it is within the Patent Box scheme until it opts out. Where a company opts out, it is unable to elect back into the scheme for five years.
What are qualifying IP rights?
For the purposes of making a Patent Box relief claim, the relevant IP rights are:
- A patent granted by the UK Intellectual Property Office
- A patent granted by the European Patent Office
- A patent granted by the national intellectual property office of Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden.
- A patent that would have been published by the UK IPO but for issues involving national security
- Medicinal and veterinary products with marketing authorisations and marketing or data protection
- Plant breeders` rights, plant variety rights and plant protection products with data protection benefits
- Supplementary protection certificates
For a relevant IP right to be a qualifying IP right, a company must have carried out qualifying development. This means either:
- Created or significantly contributed to the creation of the patented invention; or
- Performed a significant amount of activity to either develop the invention or any item or process that incorporates the patented invention or to develop the way in which the patented invention may be used or applied
The development condition will be met if:
- The company itself carried out the qualifying development and has neither left nor joined a group since it did so; or
- The company itself carried out the qualifying development, it has left or joined a group since it did so, but has performed the same type of development activities for at least 12 months since the change in ownership; or
- another group company has carried out qualifying development in relation to the IP right and the qualifying development was performed within the group of which the Patent Box company is currently a member; or
- another company (the acquired company) which has developed the patent is acquired by a group and the qualifying IP is then transferred to a different company in the group, provided that the acquired company (or another group company) continues with the same qualifying development carried on by the acquired company for at least 12 months after the acquisition by the group of the acquired company.
A patent must be granted for the Company to make a claim for Patent Box tax relief and it must be possible to link the patent to qualifying IP income. If a company has applied for a qualifying patent but it has not yet been granted, it will not be possible to make a claim for the periods during which the patent is pending. The Company may, however, elect into the scheme in respect of that patent. Once the patent has been granted, the company may reclaim corporation tax that has been paid on profits attributable to the invention during the patent-pending period. Corporation tax can be reclaimed for up to six years of the patent-pending period. This only applies where the company has elected into the Patent Box for those periods.
What income is relevant IP income?
Relevant IP income is income that falls into one of five ‘Heads’ of income. Alternatively, companies that do not have income within one of the five Heads, may use the Notional Royalties rules as a way of claiming Patent Box relief.
Head 1- Sales Income – This goes beyond income from the sales of items covered by a patent (or other qualifying IP right). It Includes sales of ‘complex products’ that include one or more qualifying items; for example, a car may include a patented part within its engine. All income from the sale of the car will fall within Head 1. Sales income also includes the sale of spares or other products that are wholly or mainly intended to be included with an item that is either covered by or includes a qualifying item; for example, a printer may include a qualifying patent in its printer head. The sale of printer cartridges that are specifically intended to be used with that printer will fall within Head 1.
Head 2- Licence income- means royalties or licence income that may be negotiated by the owner of a patent (or by a person holding a licence over a patent that permits the granting of rights to third parties)- in return for the grant of a licence to a third party.
There can be situations where the owner of a patent may be able to claim Patent Box tax relief in relation to royalties and the licensee may also be able to also claim Patent Box tax relief provided that the licence is exclusive.
For example, a pharmaceutical company may own a patent over a chemical ingredient that reduces childhood obesity. The company may decide to grant an exclusive licence to a manufacturer to permit them to incorporate the ingredient into a medicine to be manufactured and sold around the world. The pharmaceutical company may receive licence income and a percentage of the sales income generated by the sales of the medicine by way of royalties which would attract Patent Box tax relief. The manufacturer, a UK registered company, may also be able to claim relief on the sales income derived from the sales of the medicine that incorporate the patented ingredient.
Head 3-Sales income from qualifying IP- means the income from the sale or other disposal of a qualifying IP right or exclusive licence in respect of such a right.
Head 4-Damages for infringement- means any income payable to the company from an infringement or alleged infringement of the company`s qualifying IP rights held at the time of the infringement or alleged infringement.
Head 5- Other compensation- means income that is received by way of insurance, compensation or other damages which is not damages for infringement but is nonetheless to be treated as relevant IP income.
Notional Royalty- Where a company holds a qualifying IP right but is not deriving income directly from the exploitation of that right, the Notional Royalty rules may allow such a company to make a claim. The Notional Royalty rules are primrialry focused on companies that use use a qualfying IP right in a process. Such companies can base a patent box claim on the ‘Notional Royalty’ a third party would pay to use the intellectual property.
Calculating the Patent Box benefit
The benefit of the Patent Box is generally expressed as being a 10% rate of taxation. This is, however, given by way of deduction following the four stage calculation, below:
- Allocate taxable profits to a patent box stream or a non-patent box stream
- Reduce this by the routine return
- Reduce this for an element of profits relating to brand/marketing assets return
- Apply the R&D fraction to the figure calculated after stage 3.
At the end of the calculation process, one is left with the Patent Box deduction- a sum of money that is deducted from the company`s overall taxable profits which reduce the company`s corporation tax liability for the accounting period in question. The Patent Box allows for an effective rate of corporation tax payable on relevant IP profits of 10%.
How can Claritas help?
Claritas has a dedicated Innovation Reliefs Tax Group of Chartered Tax Advisors and specialists with many years of experience working with companies make both R&D and Patent Box relief claims. We can:
- Review your Intellectual Property Portfolio to identify all qualifying IP rights for the Patent Box
- Analyse and map your income to qualifying IP rights and identify what is relevant IP income for the Patent Box
- Consider all licence agreements where IP is licenced in by the company and identify whether the company qualifies for Patent Box tax relief
- Analyse accounting records and prepare the Patent Box calculation to establish the extent of corporation tax benefit and advise on whether it would be beneficial to elect into the scheme
- Review patent applications and income generated from patents pending and advise on electing into the Patent Box during the patent-pending phase
- Work with your patent attorney to assist with the drafting of a patent application for an invention where a claim for Patent Box tax relief might be contemplated in the future
- Refer you to a patent attorney where you are carrying out R&D activity and considering patenting
- Assist with identifying patenting opportunities within your business
- Prepare Patent Box tax relief claims and supporting documentation to meet the requirements of HMRC
- Review existing claims to ensure that they are optimised
- Assist with the tracking and tracing of R&D expenditure
