Understanding Patent Box.

What is Patent Box?

 

By Samuel Thomas Houghton, Trainee Patent Attorney

Edited By Mark Houghton, European Patent Attorney, Chartered (UK) Patent Attorney

 

 

This is not financial advice. Consult a licenced provisional before making any financial decision.

 

 

• Patent box is shorthand for a set of taxation regulations which enable tax liability was due to be reduced on profits attributable to a product or process in which patent rights have been granted.
• This process is not a tax loophole but an actively promoted aspect of taxation which the government seeks to use to increase research and development in the United Kingdom. [1]
• The UK government website itself is clearly headlined “Use the Patent Box to reduce your Corporation Tax on profits”. [1]
• A potential reduction in corporation tax from 25 percent to 10 percent could, on an eligible profit of £100,000 potentially reduce taxation by £15,000.
• The cost of preparing and filing and prosecuting the patent application is in the order of half that.
• The time for a patent to be applied for and granted is typically in the order around two years in the United Kingdom. [2]
• In this scenario, patent box tax relief offers a 200 percent return on capital invested within two years.
• The issue for company management should therefore not be whether it is worth it or not but: why has it not been done already?
• The purpose of the patent attorney is to prepare, file and obtain granted patents for inventions of clients.
• Some patent attorney practices, such as Patent Outsourcing Limited (Ourselves via this website) also provide a service to identify and to some extent even create inventions for clients.
• The main restriction is that patents are related to technological advances and therefore, in broad strokes, some improvement in a physical product is generally needed to obtain patent rights.

 

 

“…in this world nothing can be said to be certain, except death and taxes.”

- Benjamin Franklin, in a letter to Jean-Baptiste Le Roy, 1789 [3][4]

 

A patent, being a negative right [5], can be hard to be certain of the future value of, particularly at the early stage of development at which it may have to be apply for. Estimating the value of the prevention of infringement is a topic in its own right, particular as the value in question can be very large. Another mechanism in the UK, however, of value to a company is the use the Patent Box to reduce Corporation Tax on profits.

 

Being able to pay less tax is a direct, quantifiable and often quite an accurately forecastable source of monetary utility for a company. A penny saved is a penny earned. [6]

 

“[The Patent Box] allows companies to apply a lower rate of Corporation Tax to profits earned from its patented inventions. Companies must elect into the Patent Box to apply the lower rate of Corporation Tax which is 10%.” [1] Normally otherwise as of writing “The Corporation Tax rate for company profits is 25%.”[7]. So this is a tangible decrease.  Speak with an accountant or tax adviser for more specific information.

 

This is no small amount. The total value of relief claimed under the Patent Box was £1,363 million in the tax year 2021 to 2022.[8]

 

Most notably the utility of any given patent through Patent Box is uncorrelated with its utility to create monopoly rights. Let’s break it down. Imagine you have a patent for a technology that would compete with what you sell, but you don’t sell yourself, it would have little use for patent box, but might have great utility for preventing someone else entering the market against you and the more that the patent covered the better as it would be even more and more burdensome to circumvent. The opposite would be having a patent for a method or process for which had little value for preventing competitors as anyone could dream up a suitable variation that falls outside of the scope of the claims of your patent and which would still be viable in the market, but as your patent covers the specific permutation that you use or make in such a manner to provide Patent Box Tax Relief, you exclusively gain value from the lower tax. The most ideal case however is the scenario where your patent does both simultaneously.

If your framework for applying for a patent is only to do so in circumstances where you expect the patent to prevent a competitor from entering the market, you may miss opportunities for Tax Relief.

If you think that obtaining a patent might be of value to you feel free to get in contact using the button below.  

 

 

Footnotes

The phrase ‘death and taxes’ is now a idiom; others expressed similar phrases prior to Franklin. [3][4]

‘A penny saved is a penny earned’ is another idiom, although attributed to have been used/created by Franklin is likely apocryphal. [6]

Kodak’s reluctance to shift to digital photography is an interesting case study in coexisting technologies.

My use of the word value is primarily for monetary value, I will leave other forms of value as an exercise for the reader.

 

 

 

Citations

 

[1] HM Revenue & Customs, "Use the Patent Box to reduce your Corporation Tax on profits," Gov.uk, Published 1 January 2007, Last updated 7 May 2020. [Online]. Available: https://www.gov.uk/guidance/corporation-tax-the-patent-box. [Accessed: March 6, 2024].

 

[2] HM Government, "FOI release: Patent processing time from filing to grant," Published 1 November 2023, Date of release 4 December 2020. [Online]. Available: https://www.gov.uk/government/publications/patent-processing-time-from-filing-to-grant/patent-processing-time-from-filing-to-grant. [Accessed: March 6, 2024].

 

[3] B. Franklin and A. H. Smyth, "The writings of Benjamin Franklin," New York, Macmillan, 1905-07, p. 68. [Online]. Available: https://archive.org/details/writingsofbenjam10franuoft/page/68/mode/2up.[Accessed: March 6, 2024].

 

[4] "Death and taxes (idiom)," Wikipedia, [Online]. Available: https://en.wikipedia.org/wiki/Death_and_taxes_(idiom). [Accessed: March 6, 2024].

 

[5] R. H. Shear and T. E. Kelley, "A Researcher's Guide to Patents," Plant Physiol., vol. 132, no. 3, pp. 1127–1130, Jul. 2003, doi: 10.1104/pp.103.022301. [Online]. Available: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC526265/. [Accessed: March 6, 2024].

 

[6] G. Martin, "A penny saved is a penny earned," Phrases.org.uk, [Online]. Available: https://www.phrases.org.uk/meanings/a-penny-saved-is-a-penny-earned.html. [Accessed: March 6, 2024].

 

[7] HM Revenue & Customs, "Corporation Tax rates and reliefs," Gov.uk, [Online]. Available: https://www.gov.uk/corporation-tax-rates. [Accessed: March 6, 2024].

 

[8] HM Revenue & Customs, "Official Statistics: Patent Box reliefs statistics," Gov.uk, Published 14 September 2016, Last updated 28 September 2023. [Online]. Available: https://www.gov.uk/government/statistics/patent-box-reliefs-statistics. [Accessed: March 6, 2024].

 

[9] S. Ewing, "Image of president on American dollar bill," Uploaded on June 8th, 2020, Taken At Feb 15, 2020. [Online]. Available: https://www.pexels.com/photo/image-of-president-on-american-dollar-bill-4597810/. [Accessed: March 6, 2024].