Boxing clever: tax credits and the Patent Box

Posted on 18 Nov 2015 by Ruari McCallion

The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions.

The lower rate is 10% – less than half the current main rate of 22%. In order to qualify, company profits must come from:

  • selling patented products – that is sales of the patented product or products incorporating the patented invention or bespoke spare parts
  • licensing out patent rights
  • selling patented rights
  • infringement income
  • damages, insurance or other compensation related to patent rights

A company can also benefit from the Patent Box if it uses a manufacturing process that is patented, provides a service using a patented tool, makes or sells products that have been patented by someone else, so long as it has certain rights to develop, exploit and defend patents, and national exclusivity.

The intention is both to reward IP and to encourage qualifying work to be done in the UK.

Paul Misselbrook,  Partner in Appleyard Lees Engineering & Physics team (1)
Paul Misselbrook, partner, Appleyard Lees Engineering & Physics team.

“The patent box system has had the positive effect of helping manufacturers engage with the patent system and therefore enable them to recover greater return from their R&D,” said Paul Misselbrook, Partner in the Engineering & Physics team with Appleyard Lees, European Patent and Trade Mark Attorneys.

“Historically, the UK had high levels of R&D investment, but the statistics show a declining trend in recent times and it is hard to believe this won’t have a knock on effect on innovation.

“We work with many companies at the leading edge of their fields and see innovation on a daily basis. But it is probably right to say that many of those innovations are concentrated around next generation products.”

“Introducing the patent box relief was motivated by a belief that creating a competitive tax system encourages investment within the UK,” Bernhard Gilbey, of Squire Patton Boggs (UK) LLP explained.

“The move to link patent box reliefs to activity (the so-called ‘modified nexus approach’) will likely reduce the impact of “artificially” moving IP to countries with beneficial patent box regimes.

“I would expect the UK to be a net beneficiary of restricting patent box type tax reliefs to situations where the activity also needs to be carried on in a particular country to access the relief.”

Bernhard Gilbey, global head of Tax Strategy & Benefits group Squire Patton Boggs (UK) LLP (1)
Bernhard Gilbey, global head of Tax Strategy & Benefits group Squire Patton Boggs (UK) LLP.

Companies can seek tax benefits from R&D tax credits even if they are not currently profitable, and the process involved does not have to be patented or even patentable.

Developing a process or product that already exists in the industry, but where the information to resolve a technological uncertainty is not readily available is a qualifying activity, as is making an improvement to an existing product or process, or duplicating an existing product in an appreciably improved way.

The work doesn’t even have to have been successful; a claim can be made on the basis of technological advance.

R&D Tax Credits are payable as cash repayments of up to 33% of qualifying expenditure. They are available to SMEs; a similar scheme, known as RDEC (Research and Development Expenditure Credit) has been available to larger companies since April 1 2013.

“Once a company stops investing there, its future is at risk,” said Misselbrook.

IP protection systems, including the patent system, create a relatively level playing field across developed nations and particularly in Europe.

The main differences in R&D climates between countries will often be the indirect incentives offered by the various governments.

It may be the case, as Misselbrook suggests, that the effect of incentives such as R&D tax credits and the patent box system, have often simply improved the profitability of existing R&D rather than generating new R&D programmes.

But if you are not claiming, you should be – and make sure you are claiming everything to which you are entitled.

There is plenty of advice available, from professional advisers and specialist firms.