What are the benefits of patent box?

Patent box tax relief can be claimed where the company owns broadly either UK or EU patents or has an exclusive licence.

The benefit of patent box relief

Profits attributable to products containing patented items are taxed at 10%. This is done by way of a tax deduction.

What do the new changes mean?

The new rules mean that companies must calculate their patent box profits using an updated streaming calculation. Similar to the previous calculation, but with the addition of a calculation to factor in the UK versus overseas development of intellectual property. It is broadly designed to reduce the benefit of patent box where the IP was developed by group companies overseas. Previously a company could use the simplified standard method or elect under the legislation to use the streaming calculation. The new rules apply to new patents granted on or after 1 July 2016.

Patents granted before 1 July 2016

It should be noted however where income is received from patents granted before 1 July 2016 and the company has elected into the patent box previously, the old rules (i.e. the standard calculation) can be used up until 30 June 2021 where:

  • the value of the product is wholly or mainly attributable to old intellectual property;
  • the proportionate number of old IP rights compared to total qualifying new intellectual property rights is 80% or more. Where that is not the case but the proportionate number of old IP rights compared to total qualifying new IP rights is between 20% and 80%, then that proportion of income from the product can still be subject to the old rules up until June 2021.

Applied for a patent and receiving income

Where companies have applied for a patent and are receiving income from products containing patent-pending items which are integral to the overall product, it is important to ensure details are recorded as to how much income has been received. As well as specific costs incurred in producing those products. The benefit of patent box relief can be accumulated over a number of years before being claimed in the accounting period in which the patent is granted. However, this can only be done where companies have made an election under the legislation into the patent box regime during the accounting periods prior to when the patent is granted. The deadline to elect into the patent box regime is 2 years after the end of an accounting period.

The key to maximising patent box relief is:

  • to identify where income is received on products containing integral patent-pending items;
  • ensure any direct costs are attributable to producing those items are tracked;
  • to prepare overall profit forecasts for the company.

Need our help?

We can help you formalise your claim and decide if it would be advantageous for you to elect early into the patent box regime. Ensuring any tax relief due can be brought in to the company’s tax computation once the patent is granted.

Donna Kenyon tax

Post by Donna Kenyon