The patent box regime and the importance of election timing

The patent box regime can offer significant corporation tax savings for companies with qualifying intellectual property (IP) rights. Ensuring patent box election is made at the right time is key to maximise the tax benefits that can be achieved.

Overview of the patent box election

To access the patent box savings, companies must be elected into the regime. Once elected in, a company’s profits relating to qualifying intellectual property are subject to reduced rate of corporation tax. This rate is currently at 10%.

The election applies to all qualifying IP rights held by the company. It also applies for all subsequent accounting periods until the election is revoked.

Qualifying intellectual property / qualifying patents

When considering the potential scope of a patent box claim, qualifying IP rights include patents granted by the UK Intellectual Property Office (IPO), the EU IPO, a patent which is granted under the law of a specific European Economic Area State, or certain other rights, such as plant breeders rights. The UK Patent Box regime does not consider US patents as qualifying IP rights.

The process to obtain a patent can be complex. However, broadly speaking, new and inventive objects or processes can be eligible for a patent.

Further to owning qualifying IP rights (or being the exclusive licensee to qualifying IP rights), a company must have contributed to a significant portion of the development of the IP, in order to be eligible for patent box. Purchased IP rights can qualify if development is undertaken in house, however this can be a complex area and would requires further thought.

Timing a patent box election

To obtain tax relief through patent box, a company must first elect into the regime. Whilst this appears to be a routine compliance measure, the timing of this election requires careful consideration.

Firstly, this election can (and sometimes should) be made, even if patent has not yet been granted. This allows patent box relief on relevant IP profits from up to six years prior to the date that the IP right was granted (where a company was elected into the regime during this period). Whilst it might appear logical to elect into the regime at the earliest possible opportunity, understanding the expected IP-related profits or losses is a critical step, to ensure relief is maximised and an early election does not inadvertently reduce the benefit of the regime.

How and when to submit a patent box election to HMRC

The election must be made in writing to HMRC, specifying the first accounting period in which the election will apply. This election can be made within the company’s tax return, so factoring the normal amendment window for a company’s tax return, this election can be made up to two years from the end of the accounting period.

Another critical point to note regarding the timing of the election into the patent box regime is that a company must also elect to leave regime. If it does so, it will be unable to re-enter for five years, highlighting the importance of considering the timing of an election.

Patent box losses

Loss making ‘IP streams’ are dealt with differently to ‘normal’ trading losses incurred by a company when it is elected into the regime.

Where a company is in the regime, relevant IP losses are set against IP profits, ultimately reducing (or possibly eliminating) the tax benefit of making a patent box claim. Additionally, relevant IP losses in excess of IP profits for a given period are carried forwards and are set against future IP profits.

Scope of qualifying intellectual property profits

One final point worth considering when looking at the potential value of a patent box claim relates to the scope of qualifying IP profits. Patented components featuring in larger products, can result in the entire product being eligible for the reduced rate of corporation tax. They must be designed as part of the system, and cannot be included in the product merely to drag it into the reduced CT rate.