On the seventh day of Christmas the taxman gave to me – a reduced corporation tax bill – yippee!

When this seemingly never ending flow of work ceases, when the last nail bitingly close delivery arrives, when the Queen’s speech has finished and just before you tuck into your Christmas lunch ….. and you are offered the end of a Christmas cracker – think of the potential corporation tax savings you could generate on your patented products!


No, seriously!!


In 1857 a sweet maker and retailer from London, Tom Smith, created the ubiquitous Christmas Cracker.  Inspired by a bon bon he had in Paris in 1870 he returned to London brimming with ideas and created his own bon bons, sweets he wrapped in tissue paper developing these to include with a love motto to sustain the popularity of the bon bons year round, they gained in popularity but he wanted something more.  The story goes that he was inspired by the cracking of logs on his fire to put together two small thin pieces of card that were treated with chemicals such that when they were pulled against each other they “cracked” and Eureka – a cracker (Cosaque) was born!


The clever cracker was used at many occasions not just Christmas and the popularity meant that there was, of course, competition.  At this stage Mr Smith patented his invention.


The taxman introduced a tax relief that Tom Smith and his fellow inventors would think of as a real Christmas treat:  The Patent Box.  This relief is commonly thought of as sitting alongside the Research and Development tax credit and is aimed at UK companies with the aim of incentivising them to invest in the development of new products.


It is a relief that is applicable to UK companies generating worldwide profits from products that incorporate European patented products and processes.  The relief is provided by a reduced rate of corporation tax rate, (10%), for income generated from these products and similar Intellectual Property (IP).  The definition of qualifying income is very generous for example incorporating a patented item into a product can qualify the income generated from the whole product for Patent Box, for example a patented gearbox in a car will qualify the income generated from the car.


This rate of 10% for the Patent Box is being phased in from April 2013 and will reach this full rate of relief by 2017.


The relief is provided by an additional elective deduction in the company’s corporation tax computation, the effect of which is to reduce the rate of tax on relevant Patent Box profits to 10%.


As with any relief there are a number conditions that need to be met including that the company must fall within the UK corporation tax regime and is actively involved in the exploitation of the patent and will be applicable to both new and existing IP, although this is relaxed for particular intra group arrangements and if the company licenses its patent rights it must have exclusivity which is at least country wide.  Trademarks or copyrights do not fall within Patent Box.


A variety of different types of income will attract this lower rate of tax including:

  • Income from the sale of patents;
  • Infringement income
  • Income from sales of products with patents and
  • Patent royalties.


In order to benefit from this relief companies need to actively elect to be within the Patent Box and this needs to be made within 2 years from the end of the accounting period.  Recent news indicates that the Patent Box regime will be closed to new entrants after 31 March 2016.  So you need to act now to ensure your accounting records are suitable to capture the relevant information to allow the complex calculations to be made.   It should also be considered that companies with patents pending also need to be aware of the new rules as the relief is aggregated and given in the year the patent is granted, therefore information needs to be collated whilst the patent application is being processed.


Finally as the relief is only available to companies if you are a sole trader or partner in a partnership and hold qualifying patents you should contact us to consider whether your business could be restructured in order to benefit from the relief.


If you have any queries or would like to chat this through further please contact kelly.quail@mooreandsmalley.co.uk or give me a ring on 01772 821021.


Come back tomorrow for another Christmas treat!!