Most business owners are always looking for a way to reduce their corporation tax bill, preferring their business to get a benefit over just handing money over to the government. There are a lot of different ways you can do this, depending on your business and industry, but one of the lesser-known options is the UK’s Patent Box regime. It’s a nice little tax incentive if you have the right business for it.
What is the Patent Box regime?
The Patent Box regime was first introduced in 2013 and is a tax incentive run by HMRC with the aim of rewarding innovation in UK companies. It also encourages businesses to develop and keep their intellectual property (or IP) within the UK rather than outsourcing overseas or selling to foreign companies. It does this by allowing businesses to apply a lower rate of corporation tax on the profits earned from their own patents – taking it down from the normal corporation tax rate, currently 19%, down to 10%. As the rates of corporation tax increase, this will provide even more savings in the future. Even if the patented process is small, it’s worth doing. The average claim under Patent Box in 2018-19 was £806K, so it’s definitely worth investigating if your business has any form of patent. The Patent Box regime also works really well alongside the R&D regime for reducing corporation tax, and it provides a pretty good incentive for businesses to develop and utilise new products and patents.
What income is covered?
Of course, in order to know how much of your income will be taxed at the 10% Patent Box rate, you need to know what income is coming from that patent. After all, it’s only the profits from the patent that qualify for the reduced rate. The following income sources and types may qualify:
- Income directly from the patent or patent protected products and a product may only need one patented component for all its revenue to meet the criteria
- Patent licensing and royalties
- Patents used in processes or services
- Patent rights sold
- Damages and infringement income
So the amount of income that qualifies can be quite wide-ranging. And the more products or services that used patented elements, the more tax relief you can get. This is one of the reasons the incentive can work so well – the more you successfully patent, the more you save.
Who qualifies for the Patent Box regime?
The Patent Box regime isn’t available for all businesses. In fact, it’s pretty specific. In order to claim the reduced tax rate, you need to be a UK limited company that is currently paying corporation tax, and you need to have developed an innovative product or process that you have patented successfully and are now generating profits on.
It’s important to know that your innovation doesn’t have to be revolutionary or ground-breaking in order to apply for a patent. Many businesses shy away from applying for a patent, thinking their intellectual property isn’t patentable. That’s one of the reasons the Patent Box was created in the first place! It gives businesses the confidence to apply for patents and the tax relief to help cover the cost. Even if the product or process you patent is minor, 100% of the worldwide profits you make from it will qualify for the 10% corporation tax rate.
The other condition to bear in mind is that you as the claimant must have had a significant involvement in the development of the patented product or process. If there has been significant involvement from another group or company, then in order to claim the benefit you must also actively manage your portfolio of qualifying patent rights – which means doing things like protecting the patent, researching alternative applications for the patent, or licensing others to use the patent.
As you can imagine, working out your income for the Patent Box regime can be complicated – but with appropriate corporation tax planning it can be well worth the time investment. At Purple Lime, we can help you understand what tax relief rates you may be entitled to and support you through the process of applying for things like the Patent Box regime, all as part of our corporate tax planning service. Our aim is to keep your money in your pocket, and not put it into HMRC’s! If you would like to know more please get in touch by emailing hello@purplelime.uk.com, or calling us on 01249 263 333.