The UK is one of a number of countries that offers a ‘Patent Box’ scheme.
What is the Patent Box?
The Patent Box is a UK tax-based incentive that aims to encourage innovative companies to locate their research and development operations in the UK, by helping to outweigh the cost of patenting with patent-related tax savings. A UK-based company who has elected into the Patent Box can apply a reduced corporation tax rate of 10% to a substantial part of any worldwide profits arising from patented inventions.
Who can benefit from the Patent Box?
A UK-based company that pays UK Corporation Tax can benefit from the Patent Box, provided that the company is a qualifying company for the Patent Box, holds a qualifying intellectual property (IP) right, and has elected into the Patent Box (i.e. entry onto the Patent Box is not automatic).
What is a qualifying company?
A UK-based company that is:
- the holder of a qualifying IP right;
- the holder of an exclusive licence for a qualifying IP right;
- not a holder or exclusive licensee of a qualifying IP right, but is part of a group of companies that have qualifying IP rights.
What is a qualifying intellectual property (IP) right?
A qualifying intellectual property right is any of the following:
- A patent that has been granted by the UK Intellectual Property Office (UKIPO) or the European Patent Office (EPO);
- A patent that has been granted by the national Patent Office of any of: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden;
- A Supplementary Protection Certificate (SPC) granted by the UKIPO or EPO;
- An UK or European plant variety right;
- An UK or European plant breeder’s right; or,
- A data exclusivity right.
Note that patent applications are not qualifying IP rights. However, when a patent application grants, it becomes a qualifying IP right, and the Patent Box tax reduction can be applied retrospectively to profits earned in accounting periods up to six years before the grant, provided that the company elected into the Patent Box for those accounting periods.
Which profits are eligible for the reduced tax rate?
The Patent Box benefit applies to worldwide revenues, even if the patents are only held in the UK or in certain states of the European Economic Area. The reduced tax rate can apply to the profit made from a product that incorporates a patented component, even where the patented component is itself only a minor part of the product. The profit from an entire range of products that each incorporate a particular patented component can be included in the Patent Box.
This means that a single UK patent is enough to get into the Patent Box all the worldwide profits generated by a particular product/range of products. The Patent Box therefore significantly changes the cost-benefit calculation that may be used to decide whether to patent inventions.
As a general summary, the reduced tax rate applies to profits derived from:
- worldwide sales of products and services incorporating the patented invention, including bespoke spare parts (although some of these profits will be excluded);
- use of the patented invention in the company’s trade (the relevant profits for manufacturing process inventions are to be calculated on a notional royalty basis);
- worldwide licensing or from selling patents and other qualifying IP rights; and,
- court-awarded compensation payments for infringement, such as damages or an account of profits that would have been earned, and insurance proceeds.