Patent Box tax savings for groups of companies

Patent Box tax relief allows a UK company to reduce its corporation tax rate from 25% to 10% on applicable worldwide profits derived from patented products. In our experience, in many circumstances, the tax relief that can be claimed exceeds the cost of obtaining a UK patent covering the product.

In order to qualify for Patent Box, the claimant company needs to:

• be a UK company liable to pay Corporation Tax;
• own or exclusively licence-in an eligible patent; and
• it or another group company must have been sufficiently involved in the technological development of the invention (‘qualifying development’).

If the company claiming Patent Box tax is in a group, and the development condition is satisfied by another group company.  the claimant company must satisfy the ‘active ownership’ condition 

The active ownership condition requires the company to perform a ‘significant’ amount of management activity in relation to its qualifying IP rights, if it did not develop rights itself. This means it must be involved in the planning and decision making activities associated with developing or exploiting substantially all of its qualifying IP portfolio.

The following activities can count as management activity:

• deciding on whether to maintain protection in particular jurisdictions;
• granting licences;
• researching alternative applications for the innovation or licensing others to do so;
• where the rights are being exploited by incorporating the item into products, activities such as deciding on which products will go to market, what features those products will have and how and where they will be sold.

Whether what is done is a ‘significant’ amount of management activity is determined in the light of: the resources the company employs, the breadth of its responsibilities for the IP, the nature of the IP rights held, the amount of management they require, and the significance and impact of the of the decisions and plans the company, as opposed to other group companies, makes in relation to that IP.

The company does not have to take all decisions relating to the IP’s management, particularly if normal group governance requires reference to the parent board. But it must be actively involved in whatever activity is necessary in terms of making plans and decisions and have clear substantive responsibilities. 

Groups sometimes have a centralised board for managing the companies’ IP portfolios. Provided that directors of the Patent Box companies are represented on the board, and are active in the decision-making processes in relation to the development and exploitation of rights, then the active ownership condition is likely to be met.

There does not have to be activity in each accounting period in relation to each right, if this is commercially unnecessary. A minimal amount of activity could then be significant.

In some cases, the company may hold patents which do not require management activity. For example, the patents might not be being exploited because the company has not yet found a market for them. In such a case, simply renewing the patent annually would meet the active ownership test.

More detailed guidance is provided by HMRC here.

Less tax savings if Patent Box is claimed by a group company which did not develop the invention 

Although it possible for a company with did not undertake the ‘qualifying development’ to claim patent box this may be undesirable and it would better if it were claimed by the company which undertook the development.

This is because, following a change in the Patent Box legislation in 2016, an R&D fraction is calculated for all qualifying income streams which affects the amount of tax savings. What this essentially means is that, ideally, the claimant company should own the patents, perform most of the associated research and development and generate qualifying income. Patent Box benefits are typically diluted or cancelled entirely where different group companies perform these functions. Steps can be taken to overcome this problem if advice is sought early.

If you have any questions regarding patenting components of products or Patent Box tax relief, please feel free to contact your usual attorney at Swindell & Pearson or the author of this article, Stephen Jackson ([email protected]). You can also reach us by telephone at 01332 367051. We are very happy to listen to any enquiries from new or existing clients.