So, your client is approaching the end of eligible R&D activities, what can you offer next to add value? They might start on R&D for another project but, in many cases, they might be better off devoting resources to exploiting the results of the previous one. That’s where Patent Box might fit in!
The Patent Box is designed to encourage companies to keep and commercialise intellectual property in the UK. It allows companies to apply a lower rate of Corporation Tax to profits earned from its patented inventions.
Source: HMRC.
So if your client’s R&D project has resulted in a new invention, they may be able to patent the new technology, and then apply for Patent Box for tax relief on related profits.
What is a patent?
A patent protects new inventions and covers how things work, what they do, how they do it, what they are made of and how they are made. A patent gives the owner the right to prevent others from making, using, importing or selling the invention without permission.
Source: British Library.
The UK Intellectual Property Office (Patent Office as it is still often called) will register patents, but they don’t enforce them. That’s down to your client to negotiate a deal or fund litigation to defend against others using their IP.
Just because an idea was original to the aspiring inventor does not mean it is patentable. If someone else had had the same idea previously and patented it, your client needs to be very careful. In that case, they can’t get a patent, and they could be inadvertently infringing an existing patent, potentially wasting all the R&D effort and resources that have been devoted to it.
How long does a patent last?
Provided the patent is maintained and renewal fees paid, a profitable client business can continue to benefit from a patent and Patent Box for 20 years. So even though your client may not be profitable when they applied for the patent, it can be an investment in future success, as it opens up access to tax relief later.
What about International Patents?
International Patents (e.g., European Patents) can include ‘GB’ so, once they become effective in the UK, a client can benefit from them provided they have exclusive rights to exploit them in the UK.
Confidentiality matters in securing a patent
The newly invented technology must not have been disclosed prior to filing a patent application. Any information that your client releases publicly can put the patent at risk. That could be an incentive for some clients to structure their R&D activities more formally and keep better records, which can assist the preparation of R&D Tax Credit claims.
The ‘catch’ to getting a Patent is that you have to ‘publish the recipe’ so other businesses know how it was done, and clients may prefer to opt for relying on secrecy. Naturally a product may incorporate some features protected by patent(s) and others that are industrial secrets.
How does Patent Box work?
- The patent itself may apply to a component or sub-assembly, but Patent Box can apply to the value of the whole product in which it is incorporated.
- Patents can be deliberately narrow and specialist Patent Attorneys can be expert in finding and exploiting opportunities where even developers deeply familiar with the technologies can’t identify them.
- Patent Box only applies to Patents, not to Registered Designs or Copyright.
How much tax relief could we get through Patent Box?
The Patent Box relief allows profitable tax-paying companies who own (or exclusively licence) and exploit patents, to reduce their annual corporation tax bills by up to 47% (or 9/19ths of their tax bill).
This level of saving would only apply if 100% of the company’s sales included patentable products/components. If only a certain percentage of sales benefitted from patents, then the Patent Box relief would be reduced pro-rata in line with this percentage.
There are also other HMRC restrictions within the Patent Box calculation which can often reduce the tax saving below the 47% maximum, so it is important to obtain expert advice in negotiating this quite complex area of legislation.
For more information about Patent Box, and how we at Lumo Tax can help you, listen to this episode of our podcast: Patent Box – What you need to know.
