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Ticking the patent box – can patents reduce your tax bill?

The UK patent box is a tax break designed to encourage R&D to start and stay in the UK. It offers a reduction in corporation tax on the profits derived from patented products and processes. Corporation tax can be reduced to 10% on these profits, although as with all things tax related, it’s not that simple.

How patent box works

The calculation can be quite complex, but the headlines are:

  • You need to own or exclusively licence a granted patent;
  • Your company must have undertaken qualifying development, and made a significant contribution to the creation of the invention or to a product containing the invention.

The patent box claim can be made any time, and can be claimed up to 2 years after the end of the relevant financial year.

The key thing to understand is that the patent must be granted. UK patents can take 3-4 years to be granted, and European patents longer. Therefore, if you plan to start selling the product earlier than this it creates a bit of a problem. No granted patent = no patent box tax relief.

Fortunately there are some strategies that can help.

Fast grant

Although the default option in the UK is 3-4 years, this is not the only option. There are various mechanisms available which can speed up the patent process. These are:

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  • Combining search and examination. Usually two stages of the process, these can be combined into one.
  • Requesting early publication. Patent applications are usually published at 18 months, and won’t be granted until a minimum of three months after publication. If we ask, the UKIPO will publish the application early, meaning that the three month period will be brought forward allowing for faster grant.
  • Requesting acceleration. We can ask the UKIPO to speed things up. A reason is required, and unfortunately ‘tax relief’ is not accepted! That said, a commercial reason such as ‘fear of infringers coming on the market’ or ‘grant would aid in licence negotiations’ are usually good enough.
  • Entering the green channel. This accelerated treatment is available to ‘green’ inventions. Therefore if the invention has environmental benefits, this route should be requested if it has not automatically been entered.

According to the UKIPO, these tricks can get you a granted patent in as little as 9 months.

The smart approach

Although fast grant sounds great, it does have some side effects. One is that often a pending application is a little more scary to would be infringers than a granted patent. The scope of a granted patent is set in stone. Therefore third parties know exactly what they need to do to ‘design around’ the patent and avoid infringement. Therefore fast grant is not always the best commercial decision.

Also, generally patents will get to grant faster if we accept narrower protection. To understand this, consider the difference between broad and narrow patents:

  • A broad patent covers the core product and as many variations of it as we can protect;
  • A narrow patent focuses on the core product alone. It may be easy to design around.

So the former is better commercially, but is not great for our fast grant strategy as it usually involves a bit more of a protracted examination. Also, keeping the application pending longer is usually more commercially desirable to keep would-be infringers guessing.

So what can we do?

Best of both worlds

The good news is that we can have both. It’s possible to have a fast, narrow patent for patent box and a slower, broader patent for better commercial protection. It uses a technique called ‘dividing’ the patent application or ‘filing a divisional’. This allows the patent application to be cloned. The original application can form the patent box patent, and the ‘divisional’ used to take things slower and pursue a broader patent:

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The economics – what do patents cost?

Ultimately most clients want to know (i) what they can save in tax and (ii) what the patent costs to get granted. Question (i) is for the accountants, but in terms of (ii) a fast, narrow UK patent for a mechanical type invention can cost as little as £3500 (ex VAT) from filing to grant. This is very much at the low end of the spectrum, and the average is probably more like £5000 – £6000 (ex VAT), but all the same it is easy to see how this cost can be easily offset by the tax relief. If the product lifespan is only 5 years (patents last way longer than this- up to 20 years from filing) then it only takes £700 to £1200 of tax saving a year for the patent costs to be covered.

Everything after that is on the bottom line.

Vault IP

Vault IP is a Midlands-based, boutique intellectual property law firm, created to be an antidote to the traditional IP practice. If you would like to understand more about the patents process or require assistance with any aspect of IP protection please drop Phil Sanger a note at phil@vault-ip.com or via any of the contact details below.

+44 (0) 121 296 9164

hello@vault-ip.com

www.vault-ip.com

Agri industry driving R&D

Claiming tax relief

Paul Crooks of CATAX, an Agri-EPI member, explains how those in the agri-tech sector can make a claim for the Research and Development (R&D) tax relief available.

“The demands on farmers and the agri-tech sector, driven by requirements for increasing efficiency, minimising or mitigating environmental threats, reducing energy use, waste management etc are significant and are driving an enormous research and development effort within the industry. However, farmers and the agri-tech sector are missing out on hundreds of thousands of Pounds in unclaimed Research and Development (R&D) tax relief.

“We know not enough farmers and agricultural businesses are coming forward because the numbers reaching Catax’s door are dwarfed by those in other industries such as engineering and manufacturing. As one of the UK’s leading specialist tax companies, that finding is meaningful.”

Areas where R&D is most likely to be found in agriculture include:

  • Development and use of new technologies and processes in farming
  • Reductions in the environmental impact of the sector
  • Use of data and the internet of things to aid crop or animal management
  • Robotics and AI
  • Monitoring, satellite imagery and remote sensing
  • Increasing yield
  • Improving labour productivity through robotics and machines
  • Resource management
  • Biotechnology
  • Drone technology
  • Soil management and smart irrigation.

The project doesn’t have to be successful to qualify and claims can be back-dated two years.

“Many businesses do not realise that much of what they are doing can be categorised as R&D under the government’s rules, making them eligible for the valuable tax relief that was designed to reward and encourage innovation. The HMRC criteria for genuine R&D is whether an appreciable improvement can be shown, addressing a scientific or technological uncertainty.

“Catax worked with a leading UK equipment manufacturer who wanted to develop their own range of manure spreaders and trailers and the technological uncertainty came about in meeting new mechanical, construction and design parameters to produce a new series of equipment which had increased functionality. Our twelve years of experience in specialist tax relief enabled us to identify and, importantly, maximise the qualifying costs in this innovative project and the tax benefit to the engineering business amounted to £30 000.

“Another client wanted to develop an automatic gas purging system in his potato store and a lot of work was carried out in determining the optimum location and frequency of gas sensors which linked to the automatic purging pump. The total tax saving for this business was over £60 000.

“The average tax relief benefit for farmers and agritech businesses we have worked with has amounted to £50,000 – a significant sum which could be reinvested in the business to fuel further innovation and growth. If your business profits from products you hold a patent on, then the Patent Box Tax Relief can also help retain more of those profits in your business.”

Many businesses in receipt of public grants from Innovate etc have been advised that they cannot claim R&D Tax Relief on grant aided projects. This is untrue, although the claim is processed through a different HMRC programme to the normal one available to SME businesses and can amount to a benefit of nearly 10% of the entire R&D project.

As in most disciplines, the results achieved by specialists can differ significantly from that achieved by many generalists and the same principals apply in the field of R&D Tax Relief. Most good R&D tax specialists will work on a commission basis so cost considerations can be dismissed as no fees will apply unless a significant benefit is achieved for your business.

Catax have developed a highly efficient system which maximises your tax benefit but minimises your time involvement while we collect and process the information required.

For more information, visit: www.catax.com.