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What are patent boxes?

What are patent boxes?
Tuesday, October 30, 2018

The patent box regime was introduced by the UK government in 2013. A patent box is used to reduce the size of your corporation tax bill on the profits you make directly from patents that you successfully exploit commercially. This is part of the UK government’s drive to increase commercial research and development as the country prepares to leave the European Union.

Here is Panthera’s guide on how your company can use patent boxes to reduce its corporation tax bill.

How do patents work?

Inventors are issued a patent by the Intellectual Property Office when they create a new and innovative product. A patent prevents other people and companies from copying your idea and profiting from it.

What does a patent box actually do?

All the profits that your company makes from patent-derived sales that you submit through a patent box are taxed at 10%. This is a significant reduction from the current level of corporation tax that you would otherwise be paying otherwise – which is 19%

What are Intellectual Property Rights?

Your company must have the licence to the “qualifying IP Right” in order to add a patent to your patent box. It’s the IPO and the European Patent Office which grant these IP rights.

To qualify for IP rights, your innovation must meet the following conditions:

• your company must have created the invention

• your company must have made a significant contribution to the invention’s creation (and that can include developing ways that the invention is used or applied)

• your company carried out significant activity in the development of the invention

What is the patent box calculation?

Let Panthera help you through the patent box application process – we’ll be honest, it’s complicated and it does need the experience an accountant bring. Please don’t let that put you off the idea of applying for it though because it is well worth the effort.

The formula to work out how much you will save using a patent box looks like this:

RP × FY% × ((MR – PBR) ÷ MR)

  • RP are the profits that have resulted from your patented items
  • FY is the relief given for that year (2013-2014 at 60%, 2014-2015 at 70%, 2015-2016 at 80%, 2016-2017 at 90%, and 100% from 2017 onwards)
  • MR is the main rate of corporation tax (currently 19%)
  • PBR is the reduced 10% rate

You will now need to work out the “nexus” percentage for the second part of the calculation. For that, you use this formula:

N = (D+S) × 1.3 ÷ (D+S+A+R)

  • N – “Nexus” percentage.
  • D – your company’s research and development (R&D) expenditure
  • S – R&D your company has subcontracted out to a business with no connection to you
  • R - R&D your company has subcontracted out to a business that is connected to you
  • A – the cost you incur in acquiring any IP
  • U – uplift to your qualifying costs, the lower of 30% of D+S or your non-qualifying R+A costs

To calculate out the amount of corporation tax relief that you are eligible for, multiply the first and second sums together. The answer will show you the total amount you’ll save by using a patent box.

We can help

If you would like some advice on whether a patent box is applicable to your company and guidance on how to set one up, contact our team. Call us on 01235 768 561 or drop us an email to – we’ll be back in touch with you shortly.

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