The Patent Box – time to think inside the box, not outside it!
By Caroline Walton, Technical Operations Director
On 30th September 2020, HMRC published its annual report containing statistics for the uptake of the Patent Box. These statistics are published each Autumn and comment on the number and value of Patent Box claims submitted during the most recent fiscal year for which complete statistics are available. The statistics also comment on the most recent fiscal year for which partial statistics are available.
Complete statistics are now available for the 2017/2018 fiscal year and it is this year which provides the central focus in the report. 2017/2018 is an important period because it is the first year that the full Patent Box tax benefit (corporation tax payable at a rate of 10% on qualifying IP profits) has been available to a company. Up until this time, the Patent Box tax benefit had been phased in, from 60% of the full benefit in year one, increasing incrementally by 10% each year until the full benefit came into effect in 2017/2018. The slow uptake of companies electing into the Patent Box has been blamed, historically, on the phasing in of the benefit provisions which made it difficult for companies (and their advisers) to understand and administer the scheme and so, one would expect that the numbers of companies availing themselves of the Patent Box corporation tax savings might have dramatically increased during 2017/2018 however this is not the case.
The number of UK companies claiming Patent Box tax relief is still woefully low according to the statistics. During 2017/2018, only 1305 companies claimed the relief with most claimants (circa 360) being large companies with a turnover of more than fifty million euros and more than 250 employees. The industry sector responsible for most Patent Box claims is manufacturing with 750 companies claiming Patent Box tax relief. After manufacturing, the next sector responsible for claims is wholesale, retail and trade with 250 bringing claims for Patent Box tax relief in 2017/2018.
Whilst the number of companies claiming Patent Box tax relief during 2017/2018 has increased since 2016/2017, the value of the relief has slowed. £992m of relief was claimed in 2016/2017 and £1,101m was claimed in 2017/2018.
The statistics are surprising and it is clear that the Patent Box is still failing to achieve its core aims and its raison d`etre despite it being seven years since the scheme became effective. The Patent Box was introduced by the Finance Act 2012 (effective from 1 April 2013) to incentivise UK companies to increase the level of patenting of intellectual property (‘IP’) in the UK and ensure that any new and existing patented IP is further developed and commercialised in the UK. From an economic perspective, the goal was to encourage UK companies to manufacture and sell innovative products from the UK and to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK. The incentive for UK companies to do this is the promise of substantial corporation tax savings through the Patent Box tax relief whereby a company pays only 10% corporation tax on qualifying IP profits as opposed to the main rate of 19%.
Unfortunately, despite the substantial corporation tax savings on offer and the increase in the number of companies claiming the relief, the message is not getting through and the Patent Box is not fulfilling its brief. To illustrate this point, if one compares the number of claims for research and development tax relief submitted for the same period, 62,095 claims were submitted: an increase of 17% from the previous year.
There are several reasons to explain the low number of companies claiming Patent Box tax relief. None of these has anything to do with UK companies not investing in innovation or patenting activity or failing to commercialise their IP because we know that UK companies are spending money on research and development activity and we know that companies continue to patent and commercialise their IP. Unfortunately, the principal reasons for the low uptake of companies claiming Patent Box tax relief are lack of knowledge about the scheme and its benefits and lack of expertise in understanding how a company might qualify and make a claim.
It is hoped that lack of knowledge is addressed by an article such as this which hopes to raise awareness of the Patent Box and bring to the attention of the reader the substantial tax savings which can be achieved through a claim.
By way of a reminder, it is possible to reduce the corporation tax payable on qualifying IP profits by almost 50% if a company is eligible to claim. To be eligible, a company must either own (or have owned) a qualifying IP right or hold (or have held) an exclusive licence over a qualifying IP right, has carried out R&D activity on the underlying invention or ways in which the invention can be applied (before the invention was patented or after the patent was acquired) and have earned income in relation to the exploitation of the patent. In addition, the company, together with its adviser, should have discussed the performance of the IP within the business and assessed whether the income is forecast to continue to make election into the scheme a worthwhile consideration. The adviser should carry out a Patent Box calculation, discuss the result with the company and advise on whether there is a tax saving to make election into the scheme advisory.
There are many IP rights which qualify for consideration. Patents granted by the UK Intellectual Property Office or European Patent Office qualify. Plant variety rights qualify.
There are several heads of income which arise from exploitation of the IP right which qualify for relief. They include sales income from selling patented products or items which contain something which is patented, licence income, royalty income and damages arising from patent infringement actions. In addition, it is possible to claim relief on income which arises from other means of exploiting the qualifying IP. For example, an increase in income arising from the use of a patented machine within a business.
As with claims for research and development tax relief, it is possible to go back two previous accounting periods when claiming the relief. Whilst it is not possible to claim the relief until the qualifying IP right is in existence (patent granted), it is possible to elect in during the patent-pending period and take advantage of roll-up relief whereby excess corporation tax paid on IP profits generated during the patent-pending stage is repaid to the company on submission of the first claim.
Patents can last for up to twenty years and provided that annual renewal fees are paid, there is the potential to recover substantial corporation tax savings over a long period. If an accountant or tax adviser, retained to handle a company`s tax affairs, fails to consider the Patent Box or discuss it with a company as an option, it could result in a company paying too much corporation tax or failing to recover overpaid corporation tax- a breach of duty on the part of the adviser.
Lack of expertise can be addressed by making sure that any Patent Box enquiry and potential claim is handled by a tax agent with expertise in the area due to the many pitfalls which arise. Whilst the Patent Box has been introduced as a specific innovation incentive and to that end, it complements Research and Development tax relief, it is important to note that it is a separate scheme with different eligibility requirements. Some of the eligibility requirements require a good understanding of intellectual property, licence agreements for intellectual property as well as accounting expertise and expertise in these areas must be sought.
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