Patent Box – both old and new regimes offer serious tax advantages for innovators
Innovative UK businesses with patented products or services could, in our view, be taking greater advantage of tax relief available via the government’s Patent Box tax relief for companies.
Latest HMRC figures show that 1,170 UK companies claimed tax relief totalling £1,035 million under Patent Box in 2016-2017, but we believe that this is a small fraction of the number of companies who could benefit.
Introduced by the UK government in April 2013, Patent Box was designed to encourage UK technology innovation and entrepreneurship by providing a 10% reduction in corporation tax on income received from patents.
New rules, which made the calculations more complex, came into force on July 1 2016, but the old regime remains in place until 2021 for those companies who had joined Patent Box before then.
To calculate the profits available for relief, you firstly need to find the Patent Box profit, then make two main adjustments.
The policymakers were concerned that businesses might get the benefit of relief when they would have made those sales anyway without a patent. So, under what is known as the “routine return adjustment”, HMRC will reduce your claim by a proportion of some of your expenses.
You also need to allow for the “marketing assets return”, whereby you have to subtract in your calculation the royalty you would have had to pay if the product was not your own brand. This figure is hard to work out, but if the number is small you don’t have to make the adjustment.
Patent Box profits under the original regime are usually computed on the basis of proportionality. This means we apportion the turnover by reference to sales of the patented item, then apportion the profits accordingly.
To illustrate these calculations, let’s say your company has a £1 million turnover, with exactly half of your sales coming from the item you’ve patented. Your total profits are £200,000, so £100,000 of that profit would be the starting point for your Patent Box calculations. This figure is then adjusted for the routine return and marketing assets return (if necessary), to get to the amount of relief you can claim. For most companies that would be the simple way of going about claiming. You have a figure for turnover, and because one thing you can work out quite quickly from your records is what you’re selling, computing the relevant profits should be pretty straightforward!
However, in some cases it is possible to use an alternative method, known as “streaming”, where you allocate the specific costs against the income from the patented items. We did this for a client operating in the global transport market and got a much better outcome – effectively wiping out the company’s corporation tax liabilities for three years.
This is because the client invented a patented product but someone else is using it and paying a licence fee, so there are virtually no expenses associated with the income from the patent. By streaming the minimal costs against the income, we end up with a much larger figure for the relevant profits from the patent, which can then be the subject of the relief.
In this scenario, if only 50% of turnover came from the patented item, under the apportionment method the Patent Box profit would have been much less, as we would have had to allocate half the company’s costs against the licence income.
This means that with streaming you can, like my client, end up with a much better result.
Anyone who joined Patent Box after 2016 – and everyone from 2021, whenever they joined – will have to stream their profits and expenses, so people will need to think about their record keeping now to be sure they have the appropriate information. The regimes operate in broadly similar ways but there are subtle differences to the revised scheme which we will examine in a further blog.
As you can see, there are complexities associated with claiming Patent Box relief, but don’t let those outweigh the potential benefits. The Government wants to actively encourage businesses of all sizes and in all sectors to innovate and it is right that you benefit from the reliefs on offer.
To find out more about Patent Box – and for professional tax advice on whether the relief can be applied to your patent – please email firstname.lastname@example.org or call us on 0116 208 1020.