Patent Box; An Underutilised but Highly Beneficial Tax Relief

The well-known R&D Tax Relief scheme has seen multiple changes year-on-year, whilst Corporation Tax and National Insurance Contributions continue to rise. However, one lesser known, but still lucrative, tax relief remains underutilised and that is, Patent Box, writes Cathy Kennedy, Associate Director at Sumer Northern Ireland.

Introduced in 2013, Patent Box was implemented to encourage companies in the UK to commercialise patented innovations by offering a reduced Corporation Tax rate of 10% on qualifying profits. Unlike R&D Tax Relief, which rewards spend on achieving, or aiming to achieve, innovations, Patent Box seeks to reward companies that successfully bring their patented products to market.

Despite its potential, when compared to R&D Tax Relief, Patent Box does not have anywhere close to the same level of engagement. The latest HMRC data from 2021/22 showed that 94% of UK Patent Box claims are made by large companies, with SMEs making up just 6%. Regionally, Northern Ireland lags behind, with only 2% of UK Patent Box claims spread across 65 companies that have made claims. Given that over 9,000 Northern Irish businesses have turnovers exceeding £1m, many eligible firms may be missing out.

• Lack of Awareness – Many companies simply do not know about Patent Box or its benefits.
• Requirements – Unlike R&D Tax Relief, which involves subjective assessments of activity, Patent Box requires an absolute prerequisite – a patent.
• Secrecy Concerns – Some companies prefer to protect their IP through secrecy rather than patent registration.
• Upfront Costs – The expense of obtaining a patent could potentially deter SMEs.

The recent increase in Corporation Tax from 19% to 25% makes the Patent Box rate of 10% even more attractive. For example, a company with £1m of patent-derived profits could now save £150,000 in tax, compared to £90,000 under the previous 19% rate.

Eligible income includes:

• Sales of patented products
• Licence and royalty income
• Compensation for patent infringement

It must be noted that only UK or EU patents qualify, and companies must apply specific profit-streaming calculations to benefit from the relief.

To take full advantage of Patent Box, companies must engage in strategic intellectual property (IP) planning. They should consider whether their innovations are patentable, rather than assuming patents are only meant for high-tech industries. By integrating IP considerations into R&D planning, businesses can maximise both Patent Box and R&D Tax Relief opportunities.

To determine whether Patent Box could work for them, companies should:

• Weigh tax savings against potential disclosure concerns.
• Investigate support from Invest NI (or elsewhere) to mitigate patent application costs.
• Seek specialist legal and tax advice to ensure proper structuring and compliance.

Sumer Northern Ireland has a team of chartered accountants and engineers dedicated to helping companies establish best practice in both Patent Box and R&D Tax Relief, adhering to the legislative requirements and ensuring the appropriate reliefs are claimed.