A worthwhile wait

    Although introduced in 2013, it is only recently we have seen clients put their reservations aside, in order to make use of the attractive tax relief on offer via the Patent Box scheme.

    Patent Box enables companies to apply a lower rate of Corporation Tax on profits earned after 1 April 2013 from their patented inventions.

    Any company subject to Corporation Tax with income from patents can potentially benefit from a reduced rate of 10%, subject to the company owning patent licences in qualifying intellectual property (IP) rights or owning an exclusive licence in respect of those rights during an accounting period.

    Previously, companies have been reticent to invest in patents, primarily due to their fear years of toil and acquired internal know-how would be surrendered into the public domain upon publishing a patent. The perceived administrative burden of protecting intellectual property from infringement has also been a concern. However, we have recently seen a sharp increase in clients looking to benefit from the generous tax relief offered by Patent Box, especially since April 2017 when the relief was fully phased in.

    Applying for a patent can be a long drawn out process. Once the initial application has been filed, an examiner needs to scrutinise any “prior art” to determine whether or not any similar inventions exist. After this an initial publication needs to be made which is subjected to further examination, with any amendments communicated to the applicant.

    By the time this has been resolved and the patent granted a number of years may have passed, during which time the company applying for the patent may have accumulated significant profits on the sale of products or services relating to the relevant IP. The Patent Box relief on this profit is limited to the extent that the company has elected in to the scheme.

    For relevant profits in an accounting period to qualify for Patent Box relief, an election has to be made in respect of the IP no later than two years from the end of the accounting period. This means that companies may have to elect in to the scheme before a patent has been granted to maximise the relief claimable.

    Although this sounds straightforward enough, it is not beneficial to be elected in to the Patent Box scheme whilst IP streams are making a loss, for example in the early stages of product development when research and development activities are still ongoing. An unduly early election could result in a company’s future Patent Box relief being tapered against losses incurred in earlier years. Therefore, the timing of electing in to the scheme is key and should consider the profitability of IP in a given period.

    For further information and to discuss your requirements, please contact Abbey Tax on 0114 236 4457 and ask for Mark Wood.