5 minute read • published in partnership with BDO
Insight: Patent Box – A decade on, is the manufacturing sector realising the benefits?
Patent Box, a UK tax relief for companies that earn profits from their intellectual property (IP), is celebrating its 10th anniversary in 2023. As the corporation tax rate has risen to 25%, Patent Box claims that allow an effective tax rate of 10% on qualifying profits reduce your corporation tax by up to 60% on those profits. Lauren Wilson and Ece Akser from BDO look at the benefits to manufacturers.
The economic rationale
The Patent Box scheme is a tax incentive designed to promote IP development and protection in the UK. The Government wants to stimulate the further development and commercialisation of existing and new patents and to incentivise companies to manufacture and sell IP-backed products and services. Another important goal is to increase the number of high-skilled UK jobs related to IP development, production, and exploitation.
In today’s economic climate, many companies are looking for ways to cut costs and promote growth amidst increasing expenses. Companies that can take advantage of the Patent Box and the R&D regimes will also realise significant financial benefits so they are worth taking a closer look at.
How can manufacturing businesses benefit?
The benefits of the Patent Box can be significant. In the 2019/20 tax year, nearly 1,400 companies claimed Patent Box relief in the UK, with the projected number of claimants for the 2020/21 tax year increasing to over 1,500. The total amount of relief claimed in FY19/20 came to £1.2bn, with 53% of these claims (worth c.£388m) being made by companies within the manufacturing sector.
Yet Patent Box relief has a reputation for being complicated. It is true that there are qualifying criteria that need to be met and the relief calculations can be complex, but the Patent Box regime is usually more straightforward than people believe. Making a patent box claim may require a time investment in year 1 to establish an appropriate methodology that works for the business but, once that is established, the calculations become straightforward and systematic in future periods.
The first step is to consider if your existing products or processes are patentable as well as to review existing and pending patents to see whether tax relief can be claimed. There is no requirement for the whole product to be patented – so just one small intrinsic UK or EU patent (or an exclusive licence over one), within your products or processes, can allow your company to access the Patent Box regime.
Unlocking competitive edge: Why manufacturing businesses should consider patenting
Global competition has made most businesses in the manufacturing sector increasingly reliant on intellectual property to drive profits so it is vital to create and maintain their own IP portfolio in order to remain competitive.
There are multiple reasons why a company may want to patent its intellectual property, including:
• Protecting investments in R&D by preventing competitors from copying innovations.
• Creating new revenue streams by licensing patented technology to other companies and increasing the value of the company with a portfolio of patents.
• Enabling legal action against infringing competitors and the ability to enter cross-licensing agreements.
• Helping a company understand what technologies have already been patented by competitors and helping to create a barrier to market entry for potential competitors.
Demystifying the rules around Patent Box tax relief
It’s crucial that the patent rights are legally owned by UK companies that are subject to UK corporation tax in order to meet the criteria for the Patent Box.
Broadly, there are three steps to determining eligibility:
1 – A UK company must legally own or exclusively license a qualifying IP right
2 – The company, or another in the same group, must meet the development condition
3 – The company generates income from the qualifying IP right.
However, since 1 July 2021, the rules for calculating Patent Box relief now require the ‘nexus fraction’ for the company’s R&D spend to be applied to calculate the Relevant Intellectual Property Profits. This means that in order to realise the full benefit from the Patent Box, companies will need to demonstrate that the research and development relating to the IP was undertaken in-house (or subcontracted to a third party) more details on this can be found here. While the process for making a claim may be slightly more administratively demanding for the first year, the tracking and calculation process should be less complicated in future periods.
Could you claim relief?
If you are considering the Patent Box scheme for your UK business but are not sure if it’s the right fit for you, our team of experts can help you explore the potential benefits and weigh your options. The team has experience in:
• Patent Potential: Collaborating with you and your patent attorney to review your R&D claims and to assess possible patent opportunities.
• IP and Revenue Streams: Supporting you in identifying potentially qualifying IP and revenue streams, and provide guidance on cost allocation methods.
• Benefit Evaluation: Advise on group structures and transactions with third parties that may allow you to access the Patent Box scheme.
• Calculation Analysis: Streamlining and evaluation of different calculation methods to determine the best option for your business.