There are a lot of widely held beliefs about the UK’s Patent Box relief scheme, but how many of them are true? Carrie Rutland debunks the myths surrounding the scheme for businesses in the United Kingdom
The UK’s Patent Box scheme (Patent Box) is a tax incentive designed to encourage businesses to develop and commercialise patentable Intellectual Property (IP). While many will know the headline benefit—namely, that Patent Box claims reduce the effective rate of corporation tax paid on eligible profits to 10 percent —there are several misconceptions about how the scheme works.
Here are some common myths regarding the Patent Box – and how businesses can benefit from it.
1. Patent Box relief is only for manufacturing and technology companies
While businesses in the manufacturing and technology sectors do benefit from the Patent Box, there is no reason why companies in all sectors cannot use the scheme.
Any business with patent-derived income can make Patent Box claims, provided they meet the qualifying criteria.
2. Patent Box only applies to goods
Patented processes or technology that enable services to be provided can qualify for Patent Box relief.
For example, a computer-implemented method for time stamping a transaction – where systems document a time of payment to authenticate a user – could be patentable.
3. The whole product needs to be patented
Many products and services now contain various components that are essential to how they work. If you have a patent over one critical element, the whole of the income derived from the product or service can qualify for relief.
Helpfully, profits arising between patent submission and grant can be included in a Patent Box claim once the patent is granted.
4. Software cannot be patented
In recent years, companies have successfully applied for patents regarding software platforms. Where the software provides essential support to a service offering, income generated from that service can qualify for relief.
Suppose a business makes a successful claim for research and development (R&D) tax relief on software or other technology. In that case, it is worth seeing whether a component of that technology or software can be patented, thereby gaining access to Patent Box relief.
5. The patent must be owned to be claimed
Patent Box can be claimed if there is an exclusive licence over the qualifying IP right. A valid claim can be made if the company actively manages the IP and another company in the group has undertaken the qualifying development activities.
6. You can’t have R&D relief and Patent Box relief on the same thing
Yes, you can. In fact, you must have carried out R&D on the patented item to be able to claim Patent Box relief.
The amount of any Patent Box claim is adjusted by the ‘R&D fraction’ to limit relief where you have acquired the patent or subcontracted out the R&D leading to its creation to another group company.
7. The ‘R&D fraction’ is frozen in time
The amount of qualifying R&D spend counted for the R&D fraction adjustment is not limited to the R&D carried out before the patent was granted.
Later R&D work to apply the patented item to your products or services counts as a “good” expenditure for the R&D fraction – so, the more R&D you do to develop the patented application, the more Patent Box relief you can claim.
8. It’s not worth the hassle of trying to stream revenues and track costs
Making your first Patent Box claim can be time-consuming, but it is worth remembering that once a system for calculating the qualifying profits has been set up, compiling the details for subsequent years will become a relatively straightforward process.
9. Intragroup sales don’t count as relevant income
All sales revenue that arises from patents can qualify, including licence fees paid by members of the same group to use a patent, e.g. patented software or other technology.
10. In practice, the benefit of the Patent Box is too small to be worth the effort of claiming
Patent Box claims can be highly beneficial – namely, reducing corporation tax payable on qualifying income by 47 percent (60 percent from 2023). The actual benefit will depend on how your product and service offerings are structured.
For example, if you have a patent over something sold as an add-on to a core product, it may be worth reconfiguring that product in the future so that more income is ‘patent dependent’.
Carrie Rutland is Partner of Innovation Incentives at BDO UK
Claire McGuigan is Tax Director at BDO Northern Ireland