Patent Box – is it relevant for my company?
The aim of the Patent Box legislation is to reward companies for innovation and whilst it has been developed in conjunction with very large companies, it does apply to all sizes of entity.
Patent Box can be thought of as a tax break which kicks in when the benefit of Research & Development tax credits ends, thus providing support for innovative companies.
The relief is effective from 1 April 2013 for companies making profits from patented inventions and certain innovations. These companies can elect to have profits arising from such sources chargeable to tax at the lower rate of 10%. (The lower rate is being phased in from 1 April 2013 with full relief from 2017).
The main company criteria is that it must own or exclusively license-in the patents granted by the:
- UK Intellectual Property Office
- European Patent Office
- Following countries in the EEA: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden
The other condition in order to qualify for the 10% rate is that the company 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
There are strict rules around companies who license-in patents, where careful attention must be paid to the rights to develop, exploit and defend the patent rights.
The profits relating to qualifying patents and processes are isolated from others made in the company and taxed at the lower rate.
However, this calculation is not straight forward and often requires several adjustments before the correct profit can be determined. For many companies, there are also transfer pricing calculations to be considered which ensures that the principle of ‘arm’s length’ transactions between group companies is maintained. For SMEs, particular attention needs to be paid to the ownership of Intellectual Property (‘IP’) as there is a tendency for this to be personal.