Somewhere in Britain, a company director is studying her tax return, glancing at the figures. Something is niggling her. A voice calls from her subconscious: “Patent Box!”
What is Patent Box? She scrabbles through her memory and is suddenly assaulted by some vital phrases: “tax savings”, “patented innovations” and “10% corporation tax”. And our company director looks again, heavy-headed, at her tax return, understanding that her company has now missed out on five or six months of substantial corporation tax savings.
Does this scenario sound familiar? Are you that company director?
What was that again?
For those who do not recognise this picture, the Patent Box is a government tax regime put in place in April this year, ostensibly to encourage innovation in the UK (and, of course, to create more jobs here). It is not a tax reduction so much as a deduction of the amount of company income liable for corporation tax. Where 100% of your company’s income was liable to the 20% (or more) corporation tax, under Patent Box, this 20% (or more) will be applicable only to a portion of your income – where that income has been made from a patented process/innovation/product.
If you haven’t already elected your company into the Patent Box scheme, it is not too late. You can apply for the Patent Box deduction up to 12 months after you have filed your tax return.
What’s in it for you?
And here’s why you should – by 2017 (when 100% of your patent-related income will be eligible for the Patent Box), a company can make an annual tax saving of up to £120,000 on profits of up to £1m per annum. And this is in addition to the enhanced relief already available for certain research and development (R&D) expenditure under the R&D tax regime; so companies can benefit from both tax regimes.
All companies can benefit from the Patent Box, but figures show that small businesses have been slightly slower to respond. GlaxoSmithKline (GSK) indicated at the beginning of the year that, as a result of the Patent Box tax break, it would invest £500m in its UK business, expanding operations in Scotland and building its first new manufacturing plant in 40 years, in Cumbria. GSK chief executive Sir Andrew Witty has said: “The introduction of the Patent Box has transformed the way we view the UK as a location for new investments.”
Indeed, the Patent Box scheme has been credited, along with proposed cuts in corporation tax, with making the UK more attractive to foreign business and industry. The Financial Times reported in June that the UK saw a 22% rise in inflows of inward investment last year, compared with an 18% drop for global inflows – the steepest drop being in Europe, at 42%.
But it’s not all about the conglomerates – small businesses can benefit, too. London-based folding bike manufacturer Brompton Bicycle has a £16m turnover and is expected to save £130,000 as a result of the scheme – enough to take on another member of staff…
How does the Patent Box work?
The key to this tax scheme is, of course, the patent. To qualify for the Patent Box, a company must be making a profit from a patented product; it must own (or exclusively license – see below) the patent and have undertaken ‘qualifying development’ (ie, created or significantly contributed to the creation of the patented invention). Patents must have been granted by the UK Intellectual Property Office, the European Patent Office or in certain other countries in the European economic area.
Company profits that qualify for Patent Box are:
- Selling patented products
- Licensing out patent rights
- Selling patented rights
- Infringement income
- Damages, insurance or other compensation related to patent rights.
If your company has a licence to use another company’s patented technology, it must have:
- Rights to develop and exploit the patented invention
- One or more rights to the exclusion of all other persons (including licensor)
- Exclusivity throughout at least one entire national territory.
The percentage of patent-related profits eligible for the Patent Box will increase each financial year from April 2013. So from 1 April 2013 to 31 March 2014, 60% of your patent-related profit will be eligible for this tax relief, increasing by 10% each year until 1 April 2017, when 100% of your patent-related profit will be eligible.
HMRC has provided a simple formula to calculate the amount of your profits that will be tax-free: RP x FY% x ((MR – IPR) ÷ MR) (where RP = profits relevant to Patent Box; FY% = appropriate percentage for financial year; MR = main rate of corporation tax; IPR = reduced rate of 10%). So, for example, if your small business’s patent-related profit is £1000, your calculation would be 1000 x 60% x ((20 – 10) ÷ 20 = 300. Therefore, £300 of your patent-related profit is untaxed, and you pay 20% corporation tax on the remaining £700. By 2017, you will be paying only £100 in corporation tax on your £1000 profit!
Is it really that easy?
No, okay, it’s not as simple as it looks. That HMRC formula is easy enough but the calculations needed to assess how much of your company’s profit has come from a patented invention is harder. Your company will need to have systems in place to capture the data necessary for the calculations. And make sure your patent is registered in the name of the company – if it is registered in the name of an individual, even if your company is the only company exploiting the patent, if there is no licence, there will be no Patent Box.
But think of the long-term benefits. Current and future profits are taxed at a lower rate, if you act early. The important thing is to patent your innovations – not only will you be protecting your intellectual assets, you’ll also be eligible for this tax deduction. And Patent Box even takes into account the fact that it can take some time for a patent to be granted. Although the 10% rate will only be available once a patent is granted, profits from a product whose patent is pending – for a period of up to six years from application to grant – can also be included in Patent Box. Just think of that windfall payment of corporation tax…
Does this make you a better investment prospect? Yes – your future profits will be taxed at half the normal tax rate and, arguably, this could affect your valuation. A valuation is typically based on future profits so, if the tax applied to your profit goes down, your valuation must go up. Investors will be interested…
So don’t let big business reap all the rewards. Treasury Minister David Gauke told The Telegraph: “Large companies are well aware of [Patent Box], but it’s important that we remember this isn’t just about big pharmaceutical companies. There are lots of businesses that can benefit.”
As for our poor company director at the beginning of the story – she’s read this article, and is on the phone to her accountant…and her patent attorney.