Patent Box – is it time to take advantage?

It effectively provides technology based companies in the UK with a competitive tax environment by reducing their Corporation Tax rate to 10%, compared with the main rate of Corporation Tax of 20%, on profits attributable to innovative products and processes that are protected by a UK or European patent and certain other types of intellectual property such as supplementary protection certificates and plant variety rights. The 10% effective rate has been phased in over a period of five years and the full benefit of an effective 10% Corporation Tax rate was applicable as of 1st April 2017.

By introducing a favourable rate of Corporation Tax, HM Revenue & Customs (HMRC) aims to incentivise UK companies to:

• Increase the number of patents and other intellectual property protection that is being sought, and to ensure that the technology covered by that intellectual property is further developed and commercialised;
• Manufacture and sell innovative products protected by that intellectual property; and
• Locate the high-value jobs associated with the development and manufacture of patented technology in the UK and encourage the exploitation of patents covering that technology.

According to the latest official statistics issued by HMRC in September 2017, tax relief amounting to nearly £652 million was claimed by 1,135 companies during the the financial year 2014-2015. Almost 95% of this relief was claimed by 305 large corporations having a turnover of at least EUR 50 million. The remaining relief, about 5%, was claimed by small and medium sized companies.

Whilst the statistics show a substantial increase in the total tax  relief obtained compared to the previous year (tax relief of £365 million claimed by 828 companies in the year 2013- 14), it is clear that the use of the patent box is dominated by large companies, such as GlaxoSmithKline who announced significant new investment in their manufacturing network in the UK as a result of the Patent Box, and that there remains a reluctance among small and medium sized companies to make full use of the scheme. This may be due to the additional administrative burden in applying for tax relief under the Patent Box and a lack of awareness of the scheme and the benefits that it may provide, coupled with a lack of specialist knowledge relating to intellectual property and the accounting requirements.

Whilst the changes to the scheme that became applicable from 1st July 2016 have not made it any easier for smaller companies to take advantage of the system, due to the additional record keeping and accounting knowledge required, we would still encourage small and medium size companies to investigate the incentives provided by the Patent Box. Electing into the scheme may be worthwhile for many businesses and the procedure may not be as onerous as it first appears, especially as it may not be necessary to track R&D expenditure in detail for smaller category claims.

A company may be entitled to relief under the Patent Box if it invests in R&D and has developed products or processes that are covered by a patent. Even if your company has not previously filed patents before, it may now be worth considering whether to file patents in view of the benefit that the Patent Box may offer, in addition to the usual protection against copying that the grant of a patent can provide.

Although there are costs associated with obtaining a patent, it is important to appreciate that it is not just profits obtained as a result of selling the patented product in the UK that qualify for relief under the Patent Box; those obtained as a result of selling the product anywhere in the world are also included. As long as UK corporation tax is paid on the profits obtained as a result of the sales of a product, it is irrelevant whether those sales were made in the UK or overseas. Therefore, a UK patent is enough to enable all the worldwide profits generated as a result of selling a product covered by that patent to fall within the Patent Box. Furthermore, if a patented component is incorporated into a larger product, profits attributable to the entire product may qualify for relief under the Patent Box. For example, the profits attributable to the sale of a car may qualify for the patent box, even if the patent only covers a single engine component. These benefits, coupled with a comparison of the upfront cost of obtaining a patent with the potential Patent Box tax relief obtainable over the 20 year maximum life of a patent, may mean that the saving in Corporation Tax over that period may repay the original costs incurred in obtaining a patent several times over.

Many companies may doubt that patent protection is available for their new ideas, that patents are not worthwhile for their business due to the costs, or because they anticipate that only a narrow scope of protection will be available. However, it is important to realise that a patent may be obtained for relatively small modifications or improvements to existing products or processes. A good test is to consider whether a new or improved product or process provides an advantage or solves a problem when compared with an existing product or process that is already on sale or known. If so, then a patent application covering it has a better chance of being granted, especially in the UK, where the degree of inventiveness required to satisfy a UK examiner and obtain the grant of a patent may be lower.

In most instances it is desirable to draft a patent application to cover an invention in the broadest possible terms to prevent a competitor making minor changes that would enable them to copy the product and avoid infringement. However, as the patent only needs to protect your own product to qualify for Patent Box tax relief, it is no longer essential that it prevents your competitors from entering the market. Therefore, the application may be drafted so as to cover a particular product or process in more specific terms upon filing with the aim of obtaining quicker grant at reduced cost and that will result in a patent that is more resistant to third-party attack. Once granted, the patent will enable a company to take advantage of the Patent Box and the tax savings that it provides straight away. Although the benefit of patent box can only be claimed once a patent has been granted, the scheme allows profits arising up to six years before grant, (i.e. in the period between applying for a patent and grant) to benefit from the reduced rate.

Finally, as the Patent Box scheme is incorporated within domestic tax law, there is no reason why the regime should not continue beyond the UK leaving the EU, assuming the UK government intends to continue their high priority of supporting innovative companies undertaking R&D in the UK. In fact, the Brexit deal means the UK no longer has to seek EU approval post Brexit, the UK government may be free to increase the scope of the scheme by making it more attractive to SMEs.

If you have previously been put off making a claim under the Patent Box, now may be the time to think again.