Last year the UK government launched a Patent Box incentive scheme, enabling companies with granted UK patents to benefit from a reduced rate of corporation tax. Under this scheme, any profits derived from products that incorporate the patented product are subject to a reduced rate of corporation tax: 10% when fully implemented, rather than around 20%. The idea behind the scheme was to encourage companies to profit from patenting, and to boost R&D in the UK.
Although Patent Box is only available to those paying UK corporation tax, it has not only been possible to reap the benefits where the R&D occurs in the UK, but also where foreign corporations, for example, are ‘actively managing’ a qualifying IP portfolio but the research is done overseas. Surprisingly, perhaps, many companies are still unaware that Patent Box even exists. The potential benefits, however, are clear – according to one of our clients, Patent Box has reduced his tax bill by £1 million, an amount that far outweighs his spending on patenting.
However, things may be on the verge of changing, following a dispute between the UK and German governments. Germany has been seeking a ban on Patent Box regimes of the UK (and elsewhere) on the ground they artificially shift profits, resulting in unfair competition for foreign investment. Under the proposed compromise, the UK government will continue to offer the Patent Box relief, but only for companies actually doing R&D in the UK. A final decision has not yet been made, but it looks like tax benefits will continue to be available in some form for companies that pay UK corporation tax.
There are of course other financial incentives, such as R&D tax credits (again available for UK corporation tax payers, or even loss-making companies). The relief is calculated based on R&D expenditure and depends on the size of the company. For some SMEs it can either reduce the company’s tax bill (tax relief) or provide a cash sum (tax credit). For profitable companies, their real costs are uplifted by 150-225%. So, for every £1,000 spent, the accounts could show £2,250, effectively reducing profits and consequently the tax that must be paid. Even companies making a loss can recover a credit of up to £145 for every £1000 of qualifying expenditure. But, according to HMRC, £2 billion of tax credits remain unclaimed every year!
These financial savings are readily available to those companies that meet the qualifying criteria, and supplement the more traditional and well-known benefits that having a patent offers. For example, a patent provides an exclusive commercial right to exploit an invention and can be used to support a higher price or keep competitors further away in the marketplace. Patents are generally considered as being able to add value to a business, and provide an edge over competitors and act as a deterrent. In addition, they can have tax benefits.
Many companies who are entitled to some of the financial benefits are just not making the tax claims. If you or your clients have not yet looked into these, it may well be worthwhile doing so.