R&D tax credits is a UK tax incentive scheme which seeks to encourage UK companies to invest in R&D by allowing them to reduce their tax bill or claim payments as a proportion of their R&D expenditure. The scheme has been available to UK companies for some time and the value of it for many companies is undisputed.
In 2013, the UK Government expanded on the favourable tax incentive offered by the R&D tax credit scheme by enacting a Corporation Tax incentive, known as the Patent Box, to further capitalise on creative talent in the UK and boost innovation by incentivising and rewarding the active exploitation of patented technology in the UK.
The UK Patent Box regime offers companies a competitive tax environment by reducing the rate of Corporation Tax payable to 10%, compared with the main rate of Corporation Tax of 19%. The reduced rate is applicable to the profits derived from innovative products and processes that are protected by a qualifying IP right.
The lower rate of Corporation Tax provided by the Patent Box regime has the aim of incentivising UK companies to:
- Increase the number of patents and other intellectual property protection being sought, and to ensure that the technology covered by that intellectual property is further developed and commercialised;
- Manufacture and sell innovative products protected by that intellectual property; and
- Locate the high-value jobs associated with the development and manufacture of patented technology in the UK and encourage the exploitation of patents covering that technology.
For a company to benefit from the reduced 10% Corporation Tax rate on profits derived from UK or European patents, it must have a qualifying IP right, such as a patent granted by the UKIPO or the EPO, or a patent granted by another country within the European Economic Area that recognises the system. A qualifying IP right is not limited to patents, and may also include certain other types of intellectual property, such as supplementary protection certificates and plant variety rights.
The company must actively hold the qualifying IP right as an owner or an exclusive licensee. This means that the company must be creating, or significantly contributing to, the protected invention, or performing a significant amount of activity to develop the protected invention or any product or process incorporating it. If the company holding the patent is part of a group and the activities are carried out by another member of that group, then it must actively manage its portfolio of qualifying IP rights. It is also necessary for the company to have an income related to the IP right, such as from the sale of patented products. Finally, the majority of the relevant R&D must be carried out in the UK.
Since the introduction of the system in 2013, the total value of the relief claimed through the Patent Box regime has grown year-on-year. From the latest statistics on the uptake of the Patent Box published by HM Revenue & Customs (HMRC) in September 2018, it is apparent that this upward trend continues.
Whilst the statistics show year-on-year growth, the use of the Patent Box regime continues to be dominated by large companies. One reason for the lack of uptake by SMEs could be due to the perceived complexity of the tax calculations and the associated cost and effort of ensuring compliance. Although the additional administrative burden may be a factor, a lack of awareness of the scheme and the benefits that it may provide, coupled with a lack of specialist knowledge relating to intellectual property may also be partially to blame.
Although some SMEs might be dissuaded from claiming, we would still encourage all companies to investigate the potentially valuable incentive provided by the Patent Box regime. Electing into the scheme may be worthwhile for many businesses and the procedure may not be as onerous as it first appears.
It is also important not to underestimate the potential tax relief that may be available, bearing in mind that a UK patent is all that is needed to enable all the worldwide profits generated as a result of selling a product covered by that patent to fall within the Patent Box regime. As long as UK Corporation Tax is paid on the profits obtained as a result of, for example, the sale of a patented product, it is irrelevant whether those sales were made in the UK or overseas. Furthermore, if a patented component is incorporated into a larger product, profits attributable to the entire product may qualify for relief under the Patent Box regime. Whilst there are some upfront costs associated with obtaining a patent, once granted it can be maintained for 20 years, which means that the saving in Corporation Tax over that 20-year period can be substantial and easily justify the costs associated with obtaining the patent in the first place.
It is also important to appreciate that obtaining a patent can be sought for relatively small modifications or improvements to existing products or processes, especially if that new product or process provides an advantage or solves a problem compared with an existing product or process that is already known.
Once granted, a patent will enable a company to take advantage of the Patent Box and the tax savings that it provides straight away. Although a claim for tax relief under the Patent Box regime can only be claimed once a patent has been granted, the regime does allow for profits arising up to six years before grant (i.e. in the period between applying for a patent and grant), to benefit from the reduced rate.
Assuming that the UK Government intends to continue its high priority of supporting innovative companies undertaking R&D in the UK, we anticipate that the Patent Box regime will continue beyond Brexit. As the rules around the relief available have been influenced by the European Commission, Brexit means that the UK will no longer have to seek EU approval for favourable tax incentive regimes such as the Patent Box, and so the UK government may have free reign to implement a more generous Patent Box regime. This could make it more attractive to SMEs and further incentivise the creation of IP assets in the UK.
Please contact us if you have any further questions on the Patent Box.