The Patent Box and tax relief incentives for research and development

Jason Stevens, patent attorney at Dehns, gives an outline of how the Patent Box and R&D tax reliefs work as well as explaining why both may be available to businesses that don’t even realise it.

There are currently calls for the government to introduce more tax incentives for entrepreneurs and start-ups, but current incentives may be more generous than you think.

At the moment, there are two principal tax breaks on offer to business relating to intellectual property (IP); the Patent Box and R&D tax credits. Some other forms of tax relief are available for the ‘creative industries’, such as film tax relief and video game tax relief.

Introduced in April 2013, the Patent Box allows companies making a profit from exploiting their patents to reduce the corporation tax paid on those profits from the current rate of 21 per cent to 10 per cent. Profits can come from a variety of sources, including selling patented products (including spare parts), income from licensing the patent, and damages resulting from infringement of the patent. Further, a ‘patented product’ is not limited to the patented invention itself; a product which includes the patented invention can also count as a patented product.

The tax benefit is obtained for products protected by patents, no matter how narrow the patent is. A patent attorney will normally try to obtain a broad patent (covering the product and variations of it), in order to prevent competitors from simply ‘designing around’ the patent to produce a similar product. Sometimes, a broad patent is simply not obtainable, in view of prior existing technology, and only a very narrow patent (covering very few variations) can be obtained. This may not do much to protect a company’s position in the market, but could still be worth keeping in force in order reduce the tax bill.

The principal problem with the Patent Box is that the benefit can only be obtained from granted patents; profits from products covered by patent applications (which have yet to be granted) are not eligible for the lower tax rate. It can take several years for an application to progress from initial filing to grant, and so a company (and particularly a start-up) may not receive any benefit for some time.  

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However, even a delayed benefit is better than none, so companies should consider filing applications for any developments that look like they could be profitable. Filing and prosecuting a UK patent application need only cost a few thousand pounds, and this could easily pay for itself through fifteen years of reduced tax bills.

R&D tax credits, which may be more useful for start-ups, were introduced in 2000 for SMEs and effectively extended to larger companies in 2002. For tax credit purposes, a company is an SME if it has fewer than 500 employees and either its turnover is below €100 million or its balance sheet assets are below €85 million.  

The scheme allows a company to reduce their tax bill or claim cash credits as a proportion of their R&D expenditure, and the definition of R&D in the legislation is surprisingly broad. The credit is available if a project ‘seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’, and can even extend to the costs of fuel used during the research. A more detailed discussion of what may or may not qualify is outside the scope of this article, but can be found at HMRC’s website, and all companies (including start-ups) should check to see if any of their R&D expenditure is eligible.

The two schemes are separate; there is no need for the R&D to result in a patent application (let alone a patent) in order for the tax credits to be claimed. However, they can of course be combined; R&D can attract tax credits, and profits from any patents resulting from the R&D can then be taxed at a lower rate.  

The government doesn’t often give away free money, and it is always worth taking advantage of it. If your company does any form of research and development, check to see if tax credits are available, and consider filing patent applications (even speculative ones) which may pay for themselves several times over.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

Related Topics

Patent Box
R&D tax credits