The Patent Box was introduced to the tax system in 2013 as part of the Government’s measures to encourage innovation and investment in the UK. The regime allows companies that elect in, to enjoy a reduced 10% rate of Corporation Tax on profits attributable to certain patents, and supports the already well-established Research & Development Tax Credit schemes, which provide important relief for qualifying R&D expenditure.
In order for profits to qualify for the Patent Box, they must be derived from qualifying Intellectual Property Income. This definition is surprisingly far-reaching and particularly beneficial for the manufacturing sector, as it includes the sale of patented products themselves, sales of products that incorporate patented items, and the sale of items wholly or mainly designed to be incorporated into a patented product.
Take, for example, a company that manufactures a patented printer cartridge – not only would income from the sale of the cartridges themselves fall within the Patent Box, but also sales of printers designed to incorporate the cartridge, and income from the sale of bespoke spare parts designed to be incorporated in the printers.
Furthermore, as well as patenting the end product of the manufacturing process, it may also be possible to patent the manufacturing process itself.
Sticking with a printing theme, consider a company that has patented its printing press process – although sales of printed products could not be included within the Patent Box as the products themselves are not patented, the company could instead calculate a ‘notional royalty’, broadly equivalent to what somebody would pay to licence the patented printing process, to be treated as qualifying IP Income.
The Patent Box also extends to royalties received from licenced patents, proceeds from the outright sale of patents, as well as infringement and compensation income.
The significant tax reduction afforded by the Patent Box makes it one of the most generous tax incentives available, and whilst the commercial implications associated with applying for patent protection should never be ignored, UK manufacturers who have previously considered the filing costs to be prohibitive may now wish to reconsider their options.
However, as is often the case in tax, the calculations are complex and there are also stringent rules in place to ensure that relief is linked to development activity. Specialist advice is therefore vital before deciding whether to elect in to the regime.