Patent Box: 10 need to know facts for start-ups and early stage businesses
The Patent Box is a new statutory tax incentive introduced this month that promises to be worth a staggering £1bn to UK companies!
Experience and anecdotal evidence suggests that whilst large businesses are busy getting to grips with this new tax incentive; start-ups and SMEs have (so far) been a little more tentative in their approach to planning for and claiming their fair share of the potentially significant tax savings up for grabs.
Here are 10 need to know Patent Box facts for startups and fast growth companies:
1. Who is it for?
It applies to all companies, sizes and sectors – you just need a patent! It’s worth adding at this stage that there is a common misconception that you can’t patent software – it is possible in certain circumstances.
2. What is the benefit?
It will allow companies to apply a reduced rate of just 10% corporation tax on qualifying patent profits – this will halve the corporation tax rate payable by qualifying companies
3. What’s the catch?
Not a lot really. Disappointingly, the 10% tax rate doesn’t kick in fully until April 2017 – still, with 60% of the relief introduced now, a company could still save £6,000 tax over the next 12 months on relevant profits of £100,000. This saving is set to crank up year on year
4. What do I need to claim the relief?
You must have a granted patent and it must have been registered by either the UK IPO, the European Patent Office or certain other accredited EEA state offices.
5. What if I’ve filed a patent but its currently pending?
As long as you’ve elected into the scheme, you can accrue the benefit year on year (up to six years) and claim the tax relief in the financial year the patent is granted
6. I hold a granted patent registered with the UK IPO – is that enough?
Not quite – you must be able to demonstrate that you either created or significantly contributed to the development of the patented invention or the product that incorporates the patented invention. In a nutshell, passive ownership will not suffice
7. What if I have a licence to exploit a patent as a licensee – can I still benefit?
Yes, provided you hold an exclusive licence and you satisfy the development condition as noted above. An exclusive licence for these purposes broadly covers a nation territory
8. We have a patented invention but it only forms a tiny part of our product – is it worth it?
Absolutely! The patented invention need only form a tiny part of the overall product for the worldwide profits of the entire product to fall within the Patent Box. Yes, the rules are drafted that broadly (and yes, it is deliberate)!
9. How are the Patent Box profits calculated and how do I make a claim?
There are two methodologies for calculating the relevant patent box profits – an apportionment and streaming methodology. Streaming is mandatory in certain circumstances but it is worth modelling the numbers to see which is best for your business. You file your claim within your company tax return.
10. As a start-up or early stage company, is this really worth my time?
It is certainly worth investigating. You can only file a patent before the invention becomes public knowledge so it makes sense to consider patents at an early stage in your business regardless of the tax relief. You now have an added incentive in the form of the tax relief and a simple patent should be relatively cost effective when compared with the tax cost savings. Consider also how an ongoing 10% tax rate might add to the attraction of your business to investors or acquirers (particularly overseas e.g. US) especially if you’re eyeing an exit in the next 3-5 years…
Founder & MD
ip tax solutions – innovation tax specialists | Patent Box | R&D tax credits | EIS / SEIS