Entrepreneurial businesses advised to apply for Patent Box before rule changes introduced

Entrepreneurial UK businesses who want to make the most of the Government’s Patent Box tax savings initiative should consider applying now before stringent new rules take effect this summer.

By joining the scheme before the end of June, they could avoid onerous red tape and still enjoy the benefit of paying less tax on the money earned from their patents.

As you will be aware, Patent Box, which was introduced in April 2013 to encourage UK technology innovation and entrepreneurship, effectively offers a 10 per cent reduction in corporation tax on income received from patents.

Hypothetically, this means that businesses paying £100,000 of corporation tax, could, through Patent Box, save themselves as much as £50,000.

The scheme has, however, recently been reassessed making the rules much tighter, so new entrants wanting to benefit from the existing regime need to apply before June 30 2016.

Under the current regime, it does not matter who carried out the original research leading to the patent.  From July 2016, however, new Patent Box claimants will need to prove that they did the research themselves, or paid for it to be done by someone else.

And claims will become more complicated to make, as companies will have to track their Patent Box profits on a patent-by-patent or product-by-product basis. Some historic R&D projects may also be subject to this bureaucratic new requirement.

Larger companies with a complex corporate structure and whose R&D is undertaken by more than one of their businesses, will also find it harder to satisfy the terms of the modified scheme.   Under the new arrangement the advantages of Patent Box will be lessened because of something called the R&D fraction.

If, for instance, a  British company subcontracts  some of its R&D work to  another  business within its group, the  R&D fraction will be reduced whether or not  the company undertaking the R&D is based  in the UK or overseas. On the other hand if a UK company subcontracts its R&D to a third party outside its organisation, the R&D fraction will not be cut.

These stringent changes are causing larger British companies to re-evaluate their corporate structure in order to fulfil the terms of the revised scheme and to ensure they continue to gain from it, tax-wise.

Smaller businesses will, I fear, find it too much of a challenge to meet the scheme’s onerous new administrative requirements and could well be put off the Patent Box despite its obvious benefits.

However there is still time to take advantage of the potential tax savings offered in the existing scheme so it is well worth seeking professional corporate tax advice.