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The UK Patent Box: Significant Tax Breaks for Innovation

Emma Reynolds, Corporate Tax Partner
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Crowe have helped clients to achieve significant corporation tax savings using Patent Box reliefs - in some cases, halving their tax bill. We believe it’s time for companies to rethink their patenting strategies with Patent Box reliefs in mind.

The UK Patent Box regime is a government initiative introduced in 2013 to spur innovation. It offers a significant tax incentive for companies that develop and own qualifying intellectual property (IP).

Despite being around for over 10 years, it is claimed by less than 0.1% of UK companies. With the potential to access a 10% corporation tax rate, the Patent Box is looking increasingly attractive against the backdrop of a 25% rate for most UK companies.

Unlocking the Benefit: Qualifying for the Patent Box

Not every company can claim Patent Box relief, as with all tax breaks there are conditions to be met including:

Owning qualifying IP: Patents are the primary focus, but the regime also extends to certain medicinal or botanic innovation rights. Exclusive licences over qualifying patents are allowed also. 

Electing into the scheme: Companies must actively choose to participate in the Patent Box.

Generating profits from the IP: The tax benefit applies only to profits directly attributable to the qualifying IP, not the company's overall income.

Key Conditions to Secure the Tax Advantage

  • Meeting the qualifying criteria is just the first step. Companies must also adhere to specific conditions to retain the Patent Box benefit:
  • Demonstrating an R&D Nexus: Since 2016, companies need to show a clear link between their research and development activities and the profits generated from the patented IP. This ensures the tax break rewards genuine innovation.
  • The R&D nexus can be problematic in group scenarios and some thought is required upfront as to where qualifying profits will be earned and where relevant R&D costs have been incurred.Calculating Patentable Profits: It is necessary to isolate the profits specifically attributable to the IP. 
  • However, it is useful to note that profits from the sale of a product can qualify even if only a component of the product is patented.

Narrow Patents, Strategic Gains?

An interesting strategy which innovative companies ought to consider, is patenting inventions with narrowly defined claims for the purposes of gaining access to Patent Box reliefs.

While broad patents offer wider protection, they likely need extensive research and are therefore likely to be expensive to implement. Narrower patents can be easier and quicker to obtain.

This approach allows companies to potentially access the Patent Box benefits sooner, even if the scope of their IP protection is limited. For innovating companies which might not ordinarily seek protection using patents, this might be an interesting route to explore.

A requirement for patenting is that there is novelty in the invention – this means that companies need to think about their patenting strategy before taking products to market. There are scenarios where an adjustment to an existing invention can be patented, which could be useful to companies who are further innovating existing products.

Seeking Expert Advice

The UK Patent Box regime offers a compelling incentive for companies to innovate and retain ownership of their IP within the UK. However, navigating the complexities and maximising the benefits can be challenging.

Consulting with tax advisors and IP specialists is crucial to ensure companies meet the eligibility criteria, comply with the conditions, and ultimately leverage the Patent Box to its full potential.

Crowe have considerable experience in helping their clients to navigate the UK’s Patent Box rules and achieve significant corporation tax savings. Reach out to Emma Reynolds if you are interested in understanding how these tax reliefs could apply to your company.