Patent Box Tax Relief

9 April 2019

The UK Patent Box tax relief was introduced on 1 April 2013 and allows companies to apply a lower rate of Corporation Tax to its profits from its patented inventions. The relief was phased in over a period of years, but with effect from 1 April 2017 100% of the relief is available.

A patent is the official legal right to make or sell an invention for a particular number of years.

From 1 April 2017, the rate of Corporation Tax payable on profits arising from the use of patented inventions is 10%, compared with the normal rate of Corporation Tax of 19%. However not all income will qualify for the favourable tax rate to qualify for the reduced rate of Corporation Tax. The income must be generated from:

  • licencing of patent rights
  • sale of patent rights
  • sale of patented items
  • sale of items that incorporate a patent (e.g. sale of spare parts)
  • compensation or damages for infringement of patent rights

Income from regular activities, earned regardless of patent rights or income from marketing asset return (i.e. income earned from branding, rather than from technical innovation itself) are specifically excluded from the favourable Patent Box tax regime.

The relief is available only to companies who are liable to pay Corporation Tax, and make a profit from exploiting patented inventions. If a company is a member of a group, it may also qualify if it or another company in the group has undertaken qualifying development for the patent, by making a significant contribution to either the creation or development of the patented invention, or a product incorporating the patented invention. However, to qualify under the group rules the active ownership requirement must be met by undertaking a significant amount of management regarding the companies in the group.

You don’t necessarily have to own the patent. Companies can exclusively licence in the patents and must have undertaken qualifying development on them. To qualify for Patent Box relief the company needs to meet certain conditions. The company must have:

  • rights to develop, exploit and defend rights in the patented invention
  • one or more rights to the exclusion of all other persons (including the licensor)
  • exclusivity throughout at least an entire national territory – rights to manufacture or sell within part of a country, for example, would not qualify as exclusive

Patents can be granted by any of the following:

  • UK Intellectual Property office
  • European Patent office
  • Countries in the European Economic Area

In order to claim the reduced level of Corporation Tax, elections need to be made within 2 years after the end of the accounting period in which the relevant profit and income arose.

The Patent Box involves complex calculations and provides a real tax benefit for companies that qualify and generate profit from patents. It is therefore advisable that you seek professional advice as early as possible.

Contact Stephen Coley on scoley@ellacotts.co.uk or 01536 646000 to discuss further.