Patent Box tax relief – could it save you money?

By Anita Jaynes on 12 October, 2021

Sponsored by Purple Lime

Corporation tax is one of those things that every business has to pay – but that doesn’t mean they enjoy doing it! In fact, many business owners employ the services of specialist accountants like us in order to find ways of legitimately reducing their corporation tax bill every year, to keep money in their business rather than in HMRC’s pocket. And while there are lots of ways of doing that, there is one method that we feel many businesses overlook – the Patent Box. This neat little scheme is almost forgotten about in some circles, but at Purple Lime we know that it can save you a decent chunk of tax, if you have the right business for it.

What is the Patent Box regime?

The Patent Box regime is one of the many schemes run by HMRC, and this one is in the form of a tax incentive. HMRC wants UK based companies to develop their own intellectual property (IP) and keep it within the UK, rather than outsource their development and sell patents overseas. So, in the name of strengthening the UK economy, they offer a preferential tax rate to any business using their own patented product or process to generate a profit. 

Essentially, the Patent Box allows businesses to apply a lower rate of corporation tax to all profits they earn from using their own patents. This will take the corporation tax rate on that profit down to just 10%. At the moment that’s a saving of 9%, but as corporation tax rates rise in the future this will prove even more of a benefit. The average claim under Patent Box in 2018-19 was £806K, so it’s definitely worth investigating if your business has any form of patent. And if you pair this with the R&D tax credit scheme, your business could save a fair amount in tax without really thinking about it.

What does the Patent Box cover?

Essentially, the Patent Box tax rate covers any income and profits that come from using patented products and processes that you have developed. The element being used has to have a valid patent, but it doesn’t have to be the whole process. It can be just a small element, and the profits from the whole process will still be eligible for the tax relief. 

That might sound a little confusing, so here’s a list of the types of income sources that may qualify:

  • Income directly from the patent or patent protected products. A product may only need one patented component for all its revenue to meet the criteria.
  • Patent licensing and royalties
  • Patents used in processes or services
  • Patent rights sold
  • Damages and infringement income

And the good news is there is no real limit to the amount you could save doing this. The more patents you have and use in your business, the more profit you can claim tax relief on. It’s one of the reasons the incentive works so well – the more products or processes you patent, the more tax you can save.

Does your business qualify?

Then the question becomes, does your business qualify for the Patent Box scheme? After all, it isn’t for everyone, and there are some stringent rules about who can claim the tax relief offered. In simple terms, in order to claim Patent Box tax relief, your business must:

  • Be a UK limited company
  • Be paying UK corporation tax
  • Have developed an innovative product or process that you hold a valid patent on
  • Be generating profits using that patent

Simple, yes? But many businesses shy away from the patenting process as a whole, thinking it’s only for bigger companies with revolutionary new products. But that couldn’t be further from the truth. All you need for your IP to be patentable is for it to be unique and innovative. The Patent Box was actually created to encourage businesses to take advantage of the patent system and encourage more businesses to take their ideas and inventions to the patent stage. It gives businesses the confidence to apply for patents and the tax relief to help cover the cost. Even if the product or process you patent is minor, 100% of the worldwide profits you make from it will qualify for the 10% corporation tax rate.

However, there is one more condition to meet to be eligible for the Patent Box regime – and that’s your level of involvement with developing the patented process or product. You must have had a significant level of involvement in developing it – or be actively managing your portfolio of patent rights if another company or group was involved. This includes doing things like protecting the patent, researching alternative applications for the patent, or licensing others to use the patent.

While the process of applying for and managing the Patent Box might seem complicated, with the right support it can be a great decision for your business. At Purple Lime, we help businesses with their corporation tax planning and strategy, which includes taking advantage of things like the Patent Box regime to ensure you’re only ever paying as much corporation tax as you need to. It’s our job to keep your money in your bank account, and not in HMRC’s pocket. If you would like to know more, please get in touch by emailing, or calling us on 01249 691360.

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