Unlocking the Benefits of the UK Patent Box Scheme: A Comprehensive Guide for UK Startups

Key Takeaways:

• The UK Patent Box Scheme is a government initiative aimed at incentivizing companies to commercialize their intellectual property within the country.
• By electing into the Patent Box, eligible companies can benefit from a reduced rate of Corporation Tax of 10% on profits derived from patented inventions.
• To qualify for the Patent Box, companies must meet certain criteria, including being liable for Corporation Tax, generating profits from exploiting patented inventions, and owning or exclusively licensing-in the patents.
• The Patent Box also extends its benefits to companies involved in qualifying development for the patented inventions.
• The scheme encompasses various activities, such as selling patented products, licensing out patent rights, and generating income from infringement or compensation related to patent rights.
• Companies in the manufacturing and service sectors can also generate qualifying income if they utilize patented processes or tools.
• To enter the Patent Box, companies need to make an election within two years after the end of the accounting period in which the relevant profits and income arise.
• The calculation steps within the Patent Box regime help determine the deduction to reduce profits, ensuring the reduced 10% rate is applied to eligible income.
• Utilizing the Patent Box scheme requires careful consideration of the eligibility criteria and appropriate calculations to maximize the benefits.

Introduction

In today’s rapidly evolving business landscape, innovation plays a crucial role in driving economic growth and competitiveness. Recognizing the importance of fostering innovation, the UK government introduced the Patent Box Scheme to encourage companies to keep and commercialize their intellectual property within the country. This comprehensive guide aims to provide UK startups with an in-depth understanding of the Patent Box Scheme, its eligibility criteria, benefits, and the process of utilizing it to reduce Corporation Tax on profits derived from patented inventions.

1. Understanding the Patent Box Scheme

The Patent Box Scheme allows eligible companies to apply a lower rate of Corporation Tax to profits earned from patented inventions. By reducing the tax burden, the government aims to incentivize innovation and promote the commercialization of intellectual property within the UK. The reduced rate of Corporation Tax under the Patent Box is set at 10%, offering a significant advantage for companies seeking to maximize their profits and invest in further research and development.

2. Who Can Benefit from the Patent Box Scheme?

To benefit from the Patent Box Scheme, companies must meet specific criteria. Firstly, the company must be liable for Corporation Tax and generate profits from exploiting patented inventions. Additionally, the company must either own the patents or have exclusively licensed them in. Companies that have undertaken qualifying development for the patents are also eligible for the scheme. However, it’s important to note that after June 30, 2016, the benefits are restricted if the company has incurred expenditure in acquiring the patents or made payments to connected parties for research and development (R&D) expenditure. The impact of these factors on the calculation is determined by the R&D fraction.

3. What Makes a Patent Eligible?

To benefit from the Patent Box Scheme, companies must own or exclusively license-in patents granted by the UK Intellectual Property Office, the European Patent Office, or specific countries within the European Economic Area. These countries include Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden. Furthermore, the company or a group company must have undertaken qualifying development for the patent, contributing significantly to the creation or development of the patented invention or a product incorporating the patented invention.

4. Exclusively Licensing-in Patents

The Patent Box Scheme also allows companies to benefit from licensed-in patents. To utilize this option, the licensee must hold rights to develop, exploit, and defend the patented invention exclusively. The license must grant exclusivity throughout an entire national territory, and the licensee must meet specific conditions regarding the ability to bring infringement proceedings or receive the majority of damages awarded in successful proceedings.

5. Income from Exploiting Patented Inventions

The Patent Box Scheme covers various types of income derived from exploiting patented inventions. Profits can come from selling patented products, including the patented product itself, products incorporating the patented invention, or bespoke spare parts. Companies can also generate income by licensing out patent rights, selling patented rights, or receiving infringement income, damages, insurance, or other compensation related to patent rights. Furthermore, companies in the manufacturing and service sectors can qualify for the scheme by manufacturing using a patented process or providing a service using a patented tool. In such cases, a notional royalty can be treated as income from intellectual property.

6. Identifying and Streaming Relevant Profits

To determine which profits should be entered into the Patent Box, companies need to separate relevant intellectual property income from other income sources. This can be achieved through a process called streaming income, which applies to companies that elected into the Patent Box after June 30, 2016, had new patents after the same date, or are in the Patent Box from July 1, 2021.

7. Electing into the Patent Box

Companies aiming to benefit from the reduced rate of Corporation Tax under the Patent Box Scheme must make an election within two years after the end of the accounting period in which the relevant profits and income arose. The election can be made in the computations accompanying the Company Tax Return or separately in writing. There is no specific form of words required for the election, and no dedicated box exists on the Corporation Tax return.

8. Patent Box Calculation Steps

The Patent Box calculation steps are designed to create a deduction that reduces the profits, ensuring that the reduced rate of 10% is applied to the relevant profits. The calculation process involves assessing the eligible income, determining the routine return, calculating the marketing asset return, and combining these to arrive at the final deduction. The complexity of the calculation will vary depending on the number and type of patented products involved.

9. Calculation Examples

To better understand how the Patent Box calculation works, let’s consider an example. Suppose a company generates £1 million in profits from selling patented products and has eligible expenses amounting to £200,000. By applying the Patent Box calculation steps, the company can determine the deduction and ultimately benefit from the reduced Corporation Tax rate.

10. Answers to Patent Box Questions

For any specific queries or clarifications regarding the Patent Box Scheme, companies can contact the Specialist Incentive and Relief team. This dedicated team can assist with questions and provide guidance throughout the process of utilizing the Patent Box. Additionally, companies whose tax affairs are handled by HMRC Large Business should reach out to their customer compliance manager for further assistance.

Conclusion

The UK Patent Box Scheme offers a valuable opportunity for startups and businesses to reduce their Corporation Tax burden while promoting innovation and the commercialization of intellectual property. By electing into the Patent Box and meeting the eligibility criteria, companies can benefit from a reduced rate of 10% on profits derived from patented inventions. It is essential for UK startups to understand the criteria for eligibility, the calculation steps, and the process of electing into the scheme to maximize its advantages. By taking advantage of the Patent Box Scheme, companies can strengthen their financial position, foster innovation, and contribute to the growth of the UK startup ecosystem.

Table 1: Countries in the European Economic Area for Patent Eligibility

Backlinks:

1. HM Revenue & Customs. (2007). Use the Patent Box to reduce your Corporation Tax on profits. Retrieved July 2, 2023, from GOV.UK website: Link
2. Wikipedia Contributors. (2023, January 6). Patent box. Retrieved July 2, 2023, from Wikipedia website: Link
3. Patent Box Regimes in Europe, 2022. (2022, August 23). Retrieved July 2, 2023, from Tax Foundation website: Link

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