Are you using the 'Patent Box' regime to reduce your corporation tax?

If your company owns, or is considering registering, a patent you could be eligible for a relief which will begin to reduce your corporation tax bill. ‘Patent Box’ has been introduced to incentivise UK companies to develop new products. The tax reduction has been phased in since April 2013 so by 2017 eligible businesses will be paying just 10% tax on their relevant profits.

This reduced rate of tax will apply to certain profits derived from either licensing or sale of the patent rights or from the sale of the invention itself or, more interestingly, from the sale of products which include the patented item.

For example, take two competitor businesses each making a similar product: one has developed a patented item forming part of their product, one has not. The company with the patent could be paying 10% tax on part of its profits compared to the 24% full rate of corporation tax its competitor would be paying, giving the business with the patent an overall advantage. 

The regime is optional so a company wishing to benefit would need to elect in. Unfortunately, but perhaps not surprisingly, there are complex calculations to perform to quantify the relevant profits that would qualify for the reduced rate of tax, although for smaller businesses there is a simplified method that can be used.

We strongly advise that companies thinking that the Patent Box might be an option for them should talk to advisers sooner rather than later to determine whether they will benefit from electing in. Similarly, companies that have developed innovative products but not previously chosen to register a patent may wish to explore further the potential benefits of doing so.