What does the future hold for the Patent Box?

When the Patent Box regime was first introduced back in 2013, it appeared to be a very generous tax relief, offering a 10% rate of corporation tax in the UK, on profits derived from patents. However, on examining the rules in greater detail, and with the additional rules following the Organisation for Economic Cooperation and Development (OECD)'s Base Erosion and Profit Shifting (BEPS) project, it soon became clear that the actual benefit was somewhat different. Complex rules and a tax rate that would work out to be somewhere higher than 10%, led most to conclude that it was just not worth claiming.

Whilst complex, the rules are quite generous in their application. The lower tax rate can be claimed for:

• Relevant profits derived from a patented product.
• Relevant profits derived from a product which has a patented component or part.
• Where a process, or a part of a process, has been patented.

Broadly speaking, the patent itself must be granted under the UK Patents Act 1977 or the European Patent Convention, with certain other patents granted in other EEA states also qualifying.

The word “complex” is frequently used when speaking about Patent Box. The rules certainly are complicated but not insurmountable. The rules are designed to strip away the profit which derives from factors other than the patent itself. For instance, routine financial returns are excluded, as are profits earned from a company’s investment in marketing, business development and branding.

The outcome is a profit which is lower than a company’s management would consider to be a “commercial profit” earned from the sale of a product. This reality may, to date, have put most off.

We’re less than two years away from the introduction of a 25% rate of corporation tax, but there’s also a President Biden-led G7 rallying call for a global minimum rate of corporation tax of 15%. So where does this leave Patent Box?

The Patent Box regime does not sit favourably with the desire to achieve a global minimum rate of 15%, but I suspect this may take a few years to come to fruition. In the meantime, we have on the horizon a 25% rate of corporation tax which does now make Patent Box look more appealing. Whilst this is more than 20 months away, maybe now it is time to consider reopening the box!

If you would like further information or advice about Patent Box, please get in touch with your usual contact. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk

Ben Greves