How to Use Patent Box to Reduce Corporation Tax?

What is a Patent Box?

Patent Box is a valuable and largely appreciated initiative by the UK Government to provide extra incentives for the companies in the UK to preserve and commercialise the patents that exist currently and alongside work to develop innovative patented inventions.

Learn how to apply for a lower rate of Corporation Tax from income profits made from patented inventions and many other particular types of innovations.

If profits are earned after 1 April, 2013 from the patented inventions, companies can apply for lower rate of Corporation Tax using Patent Box system. The assistance was introduced from 1 April, 2013 and the lower rate of Corporation Tax was 10 % applied that time.

The guidelines below are referring to patents, but companies may earn benefits from the Patent Box if they carry some other botanical or medicinal innovation rights.

Claiming Patent Box - How and When?

Claiming Patent Box

If you want to get benefited from the reduced rates of Corporation tax that relates to the Patent Box, then you have to make selection. There are two ways of doing it, either you do it in the computations that will accompany you Company Tax Return or you can even write separately. No special form of words is required for this election. Within 2 years after the end of the accounting period you have to make this election during which appropriated incomes and profits occurred.

From 1 April, 2013 onwards, the full benefit of the rule is phased out. You will require applying for a proper percentage to the incomes your company earns from it patented products and inventions.

Here you can find the right percentages for each financial year from 1 April, 2013 onwards:

  1. 1 April 2013 to 31 March 2014: 60%
  2. 1 April 2014 to 31 March 2015: 70%
  3. 1 April 2015 to 31 March 2016: 80%
  4. 1 April 2016 to 31 March 2017: 90%
  5. from 1 April 2017: 100%

You will not find any separate box on the Company Tax Return section to make the election; rather you are required to apply with reduced 10% rate by deducting an extra deduction on trading from your Corporation tax incomes. This subtractions and addition is calculated by applying the following formula:

RP × FY% × ((MR - IPR) ÷ MR)

Formula shorts forms explained below:

  1. RP is profits earned by the company trade that are relevant to Patent Box
  2. FY% is for each financial year whatever appropriate percentage is applicable.
  3. MR is Corporation Tax main rate
  4. IPR is the reduced rate of 10%

This is a simple approach made by the UK government to avoid complexities just in case you have to claim losses or other assistance. So you must calculate the amount of income that your Patent Box will qualify to before you calculate the deductions.

If you are a sole trader , business start-up or a contractor then contact us for a free consultation to check if you are eligible for patent box.

Few Examples For Your Help

Let’s say, your company has business (even if you are a small business) Corporation tax profits worth £1,000 in the tax year from 1 April 2015, which would be fully eligible for the Patent Box, and 22% is the main rate of tax, then in place of reaching a tax charge of £100 by multiplying £1000 by 10%, the calculation will be:

Calculation Amount
Profits Taxable to Corporation Tax £1,000
Patent Box deduction = £1000 × 80% ((22 - 10) ÷ 22) £436
Profits Taxable to Corporation Tax £564
Tax payable = £564 × 22% £124

During a financial year, where a company’s accounting period comes which includes more than one financial year, you will require to allocate the profits your company makes from its patented products or inventions in that accounting period to every financial year.

To put it simple here, if a company has earned trade Corporation Tax profits of £1,000 in the financial year that ended on 31 December 2016, which will be eligible wholly for the Patent Box, the incomes are allocated as mentioned below:

  1. Profits that falls in a tax year 2015 (1 January 2016 to 31 March 2016) 91/366 × £1,000 = £249
  2. Profits that falls in tax year 2016 (1 April 2016 to 31 December 2016) 275/366 × £1,000 = £751
Calculation Amount
Profits Taxable to Corporation Tax £1,000
Patent Box deduction = £1000 × 80% ((22 - 10) ÷ 22) £478
Profits Taxable to Corporation Tax £522
Tax payable = £564 × 22% £114

Who Will Get Benefits from Patent Box

Benefits from Patent Box

Only those can benefit from the Patent Box who are legally responsible to Corporation Tax and is making profits by taking advantage of patented inventions. Moreover, the companies applying for Patent Box must also own or individually and wholly licence-in the patents and should have carried out qualifying development work on them. In cases where companies are in groups and if one or more companies in the groups have embarked on qualifying developments, the other companies in the group who are new to this system, too may qualify.

Eligible Patents and How to Make Use of Them

Your company can benefit from the Patent Box if your company owns or wholly and individually licence-in parents granted by the:

  • UK Intellectual Property Office
  • European Patent Office

following countries in the European Economic Area:

  1. Austria
  2. Bulgaria
  3. Czech Republic
  4. Denmark
  5. Estonia
  6. Finland
  7. Germany
  8. Hungary
  9. Poland
  10. Portugal
  11. Romania
  12. Slovakia
  13. Sweden

Whether it is your company or another group company in your group, it should have carried out qualifying developments for the patent by contributing significantly to either:

What is Groups of Companies?

You company must participate actively and play significant role in the patented invention if it is a member of a group. It should play vital role in managing the eligible patents’ portfolio of the group.

It does not mean your company has to take all the decisions regarding the portfolio, but it is important to carry out a considerable amount of the management role.

What is Exclusively licensing-in Patent Box?

Patent holders might want to license their innovations for other companies to use and develop. If a company holds license to make use of technology developed by others, it may still benefit from the Patent Box. For this to work, the company has to meet the below mentioned conditions:

  1. Patented inventions must give rights to make developments, exploit and protect rights.
  2. There should be one or more rights to the exclusion of all other persons (this also includes the licensor)
  3. Must have exclusiveness everywhere at least in the whole national region – there should be rights to make or sell within territory of a country, for example, might not become licensed as exclusive.

Additionally, either infringement proceedings must be brought by the licensee to defend its rights or must be entitled to maximum damages granted in successful proceedings associated to its rights.

The groups of companies are relaxed from exclusive licensing conditions. This proves that while one company in a group of companies own a patent box, the another company can take advantage of them.

Profits Made from Exploiting Patented Products Inventions

When it comes to profits earned from exploiting patented inventions, not all the profits that you company makes should come from exploited patented innovations. At least, your earnings must come from one of the below mentioned for a relatable IP (intellectual property):

  1. You must be selling patented products – this includes sales of patented inventions or products that are part of the patented inventions or spare parts that are custom-built
  2. If you are licensing out your patenting rights
  3. If you are into selling of patented rights
  4. If you have income from infringement
  5. If it is from damages, insurance or other payment associated with patent rights

If you company uses a manufacturing processes that are patented or offers services that uses patented tools then your company can benefit from the Patent Box. In such cases, you will have to calculate notional royalty.

If You Have Queries Related To Your Patent Box

You will come across several expert R&D Relief units stationed throughout the UK who are skilled and can assist you effortlessly with you claims. These assistance units are prearranged on geographical base, and deals with companies whose R&D base is within their postcode region. They also help you understand the Patent Box queries. These units can be contacted during the time of making claims or when claims are being put together by you.

Speak with an expert

Any questions? Schedule a call with one of our experts.

About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.

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About the author
Blog Author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.


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