The UK Patent Box regime enables businesses to benefit from a preferential rate of tax of 10% on the profits generated from qualifying patents, rather than the standard rate of corporation tax (currently 19%). The company must meet certain eligibility criteria and must calculate the benefit through a detailed calculation.

The relief applies to profits of a UK business that are generated from the worldwide sales of patented products, even if the patent only applies to a small part of the total product. It can also apply where patents have been acquired, but there are some additional conditions to meet and the relief may be restricted.

The UK Patent Box regime is available for UK companies exploiting qualifying UK or European patents; patents only qualify if they are granted by the UK Intellectual Property Office, the European Patent Office, or patents granted by specified EEA countries. This will require the company to either own outright the patent or to have an exclusive licence over a patent to exploit it.

The regime can apply to existing, newly granted or acquired patents, however the UK company must have had, or intend to have, a significant involvement in the development of the patented invention, or a product incorporating the patented item.

The development condition requires that the UK company must have had, or intend to have, a significant involvement in the development of the patented invention, or a product incorporating the patented item. Essentially, the benefit is reduced in line with the amount of Intellectual Property (IP) that is purchased or research and development (R&D) activity outsourced by the company.

If this development condition is only met because of activities of another group company, the claimant company must also actively manage its portfolio of qualifying patent rights. This may include activities such as protecting the patent, researching alternative applications for the patent or licensing others to use the patent.

A company can elect into the regime before a patent has been granted to enable the company to effectively claim tax relief on qualifying profits generated in the period from filing the patent application to the date of the patent grant. However, the accumulated relief is claimed in the tax return for the year the patent is granted.

The benefit of the Patent Box regime is such that taxable profits are reduced in relation to the income derived from the qualifying patents. Where a business is elected into the regime and makes a loss from its qualifying patents, then these ‘patent box losses’ are carried forward to offset future patent box profits from the qualifying patents.

Typically, businesses do not elect into the regime until they are deriving profits from the qualifying patents, particularly given the up-front administration that is involved. However, care is needed to ensure the potential value of electing into the regime isn’t lost by delaying until profits are made, it can be preferential in some situations to elect in during the earlier loss-making period.

The Patent Box rules were amended on 1 July 2016, although grandfathering provisions applied until 30 June 2021. The main change was to add in the requirement for a link between the patent on which the relief is being claimed and the company carrying out the research and development (R&D). This limits the benefit to the company where it has outsourced R&D to related parties or has acquired the IP. Therefore, the company must retain a ‘nexus’ with the original development and the benefit is proportionally reduced as the nexus is diluted. The calculation of the R&D fraction involves tracking the R&D expenditure annually, on a cumulative basis for up to 20 years and aligning this to each product or licence.

The Patent Box benefit is received as an additional deduction in the corporation tax computation. This is calculated via a number of steps, summarised as follows

• Identify 'relevant IP (intellectual property) income' – profits attributable to income arising from exploiting patented inventions
• Remove a ‘routine profit’ – an adjustment that is made to reflect the fact that a business would be expected to earn a profit even if it had no access to patented technology or intellectual property
• Remove the ‘marketing asset return’ – an adjustment for profit associated with other intangible assets, such as brand or other marketing assets
• Apply an R&D fraction – to limit the benefit by reference to the proportion of R&D that the business itself has undertaken in developing the qualifying IP right

The changes introduced from 30 June 2016 became mandatory from 1 July 2021. All businesses must now use the streaming method to calculate the benefit. This requires full analysis of the business’s income and expenditure such that the income and expenses are split appropriately between patented and non-patented sales.

Calculating the Patent Box benefit can be a daunting prospect, however our specialists at Evelyn Partners are able to work with you to help get this set up. We can also help you amend your internal systems to capture this data real time moving forwards.