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Patent Box: What is it and how can your company benefit from tax relief?

There are still far too many people who haven’t heard of Patent Box or realise how it can help their business benefit from tax relief.

You could be sitting on a potentially significant tax refund and you don’t even know it. Patent Box is a Corporation Tax relief which gives a reduced rate of tax on income deriving from the commercial exploitation of patents, and there are a huge amount of companies failing to take advantage of it. And goodness knows why.

It’s been around for several years now, but never really taken off. A lot of our clients at Cresco will be eligible, as indeed will a lot of other companies. I think there’s a degree of ignorance about it, and even a fear of the unknown, because it’s seen as quite a complex process, whereas it isn’t.

Not many accountants specialise in this area, but one who does is Neil Taylor, a director at Edwards Chartered Accountants, who are based in Nottingham and Walsall.

I’ve heard it said that small companies with a successful, patented product could quickly become the large companies of tomorrow, and it is recommended they start putting effective record-keeping processes in place now to ensure they can make Patent Box claims more easily once they are profitable.

So, I thought our clients at Cresco, whether they’ve heard of the Patent Box or not, deserve to know more about it, because there could be significant savings to be made.

To best do that, I’ll hand over to Neil, who will take it from here.

How Patent Box could halve your tax bill

“There is quite a lot to a Patent Box claim,” says Neil. “We’ve done several of them now and it’s a bit like a lot of things – the first time you look at it, it’s fairly horrendous, but after you’ve done a dozen or so, some of the issues aren’t really that daunting.

“If a client has got patents, you want to keep it easy for them. If they’ve got an accountant or consultant who can help, and has been through the process a few times before, it’s not that bad.

“When talking about Patent Box, we try to keep it simple as possible because it’s a positive message. The ifs, buts and maybes are the very things that put people off.

“Patent Box is an incentive for companies who have carried out development and patented their work. It’s a Corporation Tax incentive, which means they pay less Corporation Tax.

“The headline rate is that the income generated from patents are eligible to pay tax at 10 per cent as opposed to a main rate of 19 per cent. So you’re potentially almost halving the tax bill on the profits generated by patented products.

“If an innovative company comes to us and they’ve got a Corporation Tax liability, we find out whether they’ve got patents. Most of the time they’ve never made a Patent Box claim. They’ve got these patents so we try to isolate the income and profits they make from the patents, and prepare a Patent Box claim on their behalf.”

Patent Box is a reduction in tax – you have to be a tax-paying company. It either means you’ve paid too much and you get some of that money back, or you just don’t pay as much tax as you would otherwise do.

Neil adds: “While it looks complicated, the basics are very simple. If someone comes to us who has made profits, pays Corporation Tax and has patents, all they’re doing is splitting their income and profits between patented and non-patented products.

“The first thing we’d do is get a list of their patents and check their eligibility for Patent Box. We do nearly all the work for them.

“There are accountants out there who don’t specialise in technology companies so might not be fully aware of the details of the scheme.

Why Patent Box could be worth a lot of money

“In terms of what we’ve claimed for our clients over the years, we’ve had a few that are relatively small, £10,000 or £20,000, and we’ve had a couple of well over £100,000. There’s no upper limit, it could be hundreds of thousands, if not millions depending on the profits that the companies are making.”

There are, says Neil, three main indicators for companies seeking to make a Patent Box claim.

1)     Does the company make a lot of money, as it stands in its accounts, and what percentage of the products it sells are patented? If a high percentage of its total sales are patented sales, and it makes a lot of money, the claim will be worth a lot to them. That’s because of tax reductions, so if for example you’re paying corporation tax on profits of £1m at 19 per cent, by changing the tax rate to nearer 10 per cent, it is obviously worth a lot of money to you.

2)     Another really positive note is the income that qualifies. If you sell a TV which contains one particular integral part that you’ve developed and patented, it’s the income from the sale of the whole TV that qualifies, not just the income from the patented part. The message here is that often more income than you might think will qualify for Patent Box.

3)     The third thing is pending patents. Patents can take a number of years to progress from submission to grant. When you submit an application, it is described as pending. Income can qualify as soon as the patent is pending, but you can’t claim tax relief straight away because you don’t know if it’s going to successfully progress to a granted patent. When your claim is granted, you are able to claim all income from the date it became pending. If, for example, it had been pending for five years, you get the benefit of all that income you’ve generated in those five years. It all comes in as one big windfall gain. The misconception is to not bother with Patent Box until they’re granted, but there is plenty of scope there to have a review of those pending patents and try to work out what value is in there.

Generally, Patent Box is a scheme for companies that are making money, or are very confident about making money, because it’s a tax reduction and HMRC, says Neil, want companies to claim.

“Patent Box is still a relatively new scheme, and there have been some changes in the rules, but it’s difficult to know why people aren’t claiming.

“On the face of it, it’s not as glamorous as R&D Tax Credits, and it doesn’t get quite get the same advertising space. But for the right company, the Patent Box can be quite lucrative.

“Some companies won’t consider themselves to be in the right field necessarily, they’re not technology companies, but they might have a patent from seven or eight years ago, and that’s the one that’s likely to be earning the company a lot of money off the back of it.”

Find out if you’re eligible

If you think you qualify for Patent Box, or if you want to find out if you qualify, what do you do?

“Don’t just accept that you’re not eligible, find out why,” says Neil. “If you earn profits, pay tax and own patents, why wouldn’t you claim? Very big companies are claiming it, it’s the SMEs that aren’t.

“If you’ve got those patents, and you’re a tax-paying company, we can go back a couple of years and possibly get you a big tax refund now, and going forward you’ll pay less tax every year.

“Everyone gets excited about a big tax refund, but in future revenue streams, going forward is a bigger story because you’ll pay less tax in the next 10, 15 years. It’s worth huge amounts of money for some.

“In one initial meeting, we can quickly guess how much tax you could get back. Within a reasonable degree, we’ll be able to say we can get you £10,000, or £50,000 or even £100,000, because we’ve done the hard yards on it, and we know how the calculation flows.”

If you’d like some more information on Patent Box, or think you could be eligible and would like to talk to someone, please give Jo Derbyshire a call on 01509 261182 or drop us a line at info@crescoinnovation.co.uk