The Patent Box tax relief is a scheme introduced by the UK Government to encourage innovation and investment in research and development (R&D) activities.
This tax incentive aims to reward companies that develop and commercialise patented technology by offering a lower tax rate on profits derived from those patents.
Corporation Tax increased from 19% to 25% from 1 April 2023 for companies with profits over £250,000, thus increasing the benefit of claiming Patent Box relief.
This program is designed to provide incentives for businesses to create and commercialise intellectual property (IP) in the UK and to retain that IP in the UK rather than moving it to other countries.
Which companies are eligible?
To be eligible for the Patent Box Scheme, a company must have a qualifying patent or an exclusive license for a qualifying patent.
A qualifying patent is one that has been granted by the UK Intellectual Property Office (IPO), the European Patent Office (EPO), or certain other countries’ patent offices.
The patent must cover a product or process that is innovative and involves technical advancements in the field.
Qualifying conditions
To qualify for the Patent Box Scheme, companies must meet the following conditions:
- Own or exclusively license in a qualifying patent
- Be liable to pay corporation tax
- Receive income from qualifying IP rights
- Undertake research and development (R&D) activities related to the patented invention
How does the relief work?
Under the Patent Box Scheme, companies can benefit from a lower tax rate of 10% on profits derived from the exploitation of qualifying patents.
The lower tax rate applies to the proportion of profits that can be attributed to the qualifying IP rights, which is determined by a formula.
The formula considers the R&D expenses incurred to develop the patented technology and the revenue generated from the patented technology.
Example case study
ABC Ltd is a UK-based company that develops and commercialises innovative technology products.
They have recently been granted a qualifying patent for a new software product that they have developed.
ABC Ltd has incurred £1 million in R&D expenses to develop the patented technology, and they estimate that they will earn £5 million in revenue from the sale of the patented software over the next five years.
Under the Patent Box Scheme, ABC Ltd will be eligible for a lower tax rate of 10% on the profits generated from the patented software.
To calculate the proportion of profits eligible for the lower tax rate, ABC Ltd will use the following formula:
Profits eligible for lower tax rate = (Qualifying IP income / Total income) x (R&D expenditure / Total R&D expenditure)
Assuming that ABC Ltd has a total income of £10 million and total R&D expenditure of £2 million, and that the income generated from the patented software is £3 million, then the proportion of profits eligible for the lower tax rate would be:
(£3 million / £10 million) x (£1 million / £2 million) = 0.15 x 0.5 = 0.075 or 7.5%
Therefore, ABC Ltd will be able to benefit from a lower tax rate of 10% on 7.5% of their profits generated from the patented software.
This will result in a tax saving of £30,000 per year for the next five years.
Summary
The Patent Box Scheme is a valuable tax relief program that encourages innovation and investment in R&D activities in the UK.
By reducing the tax rate on profits generated from patented inventions, companies can benefit from significant tax savings and reinvest those savings into further R&D activities.
However, it is important to ensure that your company meets the eligibility criteria and the qualifying conditions to maximise the benefits of this scheme.
Williamson & Croft can provide valuable assistance and guidance on the Patent Box Scheme process.
We can help identify whether your company is eligible for the scheme, review your patent portfolio, and evaluate the potential tax savings.
Our team of experts can also assist with the calculation of the profits eligible for the lower tax rate and the completion of the necessary documentation for HMRC.
Furthermore, we can advise on R&D tax credits, another valuable tax incentive for businesses investing in innovation.
With our in-depth knowledge and experience in tax planning, we can help your company make the most of the available tax relief schemes to achieve your business goals.
Ready to take your business to the next level? Contact us today and let’s get started!