Tax Cuts with Patent Box

Oct 1, 2013 | Uncategorized

With everybody over that back to school feeling, Graeme Lovell, Langdowns DFK Tax Director looks at how you can use ‘Patent Box’ to half your tax liability…

Viewers of Dragon’s Den may be somewhat familiar with the following scene …

Peter Jones: “Have you got the patent?”

Sheepish-looking Contestant: “Er, no”

Peter Jones: “So, what’s stopping me setting up a company inside 24 hours, and just copying what you’re doing? I’m out …”

But there’s now another reason why the Dragons might look at budding entrepreneurs with even greater contempt if they haven’t applied for a patent: they are missing out on an opportunity to cut their tax bill in half. HM Revenue & Customs have recently introduced legislation that positively encourages limited company businesses to do so.

‘Patent Box’ is one of the most generous schemes ever introduced in the corporate tax arena. Essentially, it is a scheme that enables tax on profits to be slashed. With effect from 1st April 2013, tax on profits can be reduced down to 13%. By 2017, that will have reduced still further, down to 10%.

Like the UK Intellectual Property Office (IPO) says on the home page of its website:

“… Patents protect the features and processes that make things work. This lets inventors profit from their inventions …”

The requirement for a corporate tax discount is that there are profits which are derived from activities where a patent has been issued. The patent need not be a massive part of what the business does. Provided it is a component of a division of the business that makes profits, those profits can be taxed at the reduced rate.

Example: Company A makes and sells widgets. Part of the widget comprises a specially designed threaded screw with a flat-headed bolt, which makes it different than other widgets assembled by competitors. Even though the threaded screw with a flat-headed bolt is only a small component of the process, it means that all profits from the sale of the widget can be taxed at the reduced rate.

Historically, patents used to be drafted as broadly as possible, without being so broad as to be unenforceable. Now, it is increasingly the case that businesses are looking at getting patents for a niche part of their activities, where the major part of the profits are made, purely to generate a tax saving.

The relevant patent can have been issued by the UK IPO, or a European equivalent. One pivotal aspect is that details of the innovation that a patent is being applied for must not have been publicly disclosed e.g. on a website or any other means.

Which basically means that whenever if Peter Jones gets an “Er, no” to his stock question, the fact that it is on a nationally broadcast TV programme means it is already too late!

Langdowns DFK are jointly hosting a Patent Box seminar with Patent Attorneys Barker Brettell on 14th November 2013. Please let us know if you would like to attend, and we will arrange for your place at the event.

Other posts you might like:

Experience our expertise yourself

You’ve got questions and we’d love to get to know you, so why not get in touch?

ICAEW logo
ICAEW logo
Xero Platinum partner logo

Contact us