On the face of it, the patent box is a no-brainer – with promises of reduced corporation tax rates for profits related to a patented product. There are some subtleties. One of these is choosing exactly when to elect in to the scheme. Time this incorrectly and you could shoot yourself in the foot by losing at least some patent box relief.
This subtlety arises because it is possible to make a “patent box loss”. In one example, a patent box loss might occur where profits from a product are lower than might be routinely expected. The calculation of whether you have a patent box loss or profit can be complex and this should be discussed with your usual adviser (your accountant or us or both).
Any patent box loss must be offset against a patent box profit – for example in a future accounting period for the same product, or in the same accounting period for another product.
It is possible to elect in to the patent box while a patent application is pending, but relief is only available when the patent is granted. When the patent is granted, relief can be claimed for up to six years prior to grant, for any years that you were elected in to the scheme. Therefore, there is potentially an advantage to electing in early, while your application is still pending.
If your company has more than one product covered by a granted patent, then it is worth noting that all of your relevant trade is subject to the patent box while you are elected in. Calculations on all of your granted patents must be included in the scheme, but for any pending applications you can decide separately whether to elect in or not.
If you elect out of the patent box, then you can only elect in again after five years.
Therefore the initial decision to elect in may be complex and require some analysis of whether you are currently making a patent box profit, and how that will fluctuate over the next few years.
In practice, you can elect into the scheme within two years of the end of the accounting period in which patent box profits (or losses) are incurred. Therefore, it is worth raising this issue with your adviser at the time of every return to make sure it has been considered.
Timed ideally, your decision to elect in will mean that the effect of patent box losses is minimised and future relief is available in full. So, don’t elect in too early or too late!