Unlocking Patent Box tax savings with a single component patent

Patent Box tax relief allows a UK company to reduce its corporation tax rate from 25% to 10% on worldwide profits derived from patented products. This underutilised government scheme can potentially save patent rights holders a significant amount of money.

A single granted UK patent or a single granted European patent is sufficient to claim Patent Box tax relief. In our experience, in many circumstances, the tax relief that can be claimed exceeds the cost of obtaining a UK patent covering the product.

Claiming Patent Box with a single patent for a component

Patent Box tax relief can be applied to the “relevant IP profit” made from “relevant IP income”. This “relevant IP income” includes income made from the sale of products that incorporate the patented invention. 

A question then arises as to whether it is possible to patent a component part of a product/system and claim Patent Box tax relief on the sale of the whole product/system. In general, the answer to this question is: yes, it is possible to claim Patent Box tax relief on the sale of the whole product/system even if only a component part has been patented that is incorporated into the product/system. However, there are some restrictions on this. 

In order for Patent Box to be claimed in respect of a product/system based on a single patented component, the component part must be incorporated into the product/system for the operating life of the system and be essential for the normal use of the product/system. This does not mean, however, that a single instance of the component needs to last as long as the wider system, as the component itself may be a consumable/replaceable item.

Below is an overview, intended to give examples where Patent Box can be claimed when considering a system in which only a single component is patented. These examples are derived from HMRC guidance, which is provided here, with official examples given here.

Example 1: Patented consumables sold alongside non-patented systems

As an example, if a patented printer cartridge is sold alongside a non-patented printer, profits from the whole sale are eligible for Patent Box relief. This is despite the fact that the printer itself is not patented and the printer cartridge itself is designed to be consumed and replaced. Furthermore, the patented cartridge itself need not be pre-installed within the printer when the printer and the cartridge are sold together.

The printer cartridge is a consumable which is required for normal operation of the printer throughout the working lifetime of the printer. The whole system is therefore eligible for Patent Box relief.

Other examples in the same vein could be a non-patented coffee machine being sold alongside a patented coffee pod that fits within the machine, or a patented razor blade being sold alongside a non-patented handle.

Example 2: Bespoke non-patented consumables for patented systems

Another example could be selling non-patented ink cartridges that are specifically designed to be bespoke for a patented printer.

Although there is no patent on the ink cartridge itself, the ink cartridge could be sold separately from the patented printer and still be eligible for Patent Box relief. This is because the ink cartridge itself is bespoke and is therefore an essential component for normal use of the patented printer, even though the cartridge itself has no patent and the cartridge is intended to be consumed and replaced.

Example 3: Bespoke spare parts for patented systems

The principle of example 2 extends generally into the spare parts market. If a company is selling bespoke spare parts for a patented product/system, then the sale of the spare parts themselves qualifies as relevant IP income for the purposes of claiming Patent Box tax relief, as long as the spare parts are wholly or mainly designed to be incorporated into a patented system.

What is interesting is that it is not necessary for the spare parts by themselves to be protected by a patent, as long as they are made to fit exclusively in a larger patented system. An example of this could be a bespoke part for a patented car engine.

Example 4: Patented system of individual items designed and sold to work together but aren’t physically incorporated

A system of individual items, where the items are not physically incorporated with one another, is also eligible for Patent Box tax relief, provided that there is a patent over the system as a whole.

For instance, consider a patented a Wi-Fi system that includes multiple range extenders which communicate wirelessly. Parts of the system (e.g., the range extenders) are not physically incorporated into a larger product. Nevertheless, given that the system is patented and designed to work together, income from the sale of the whole system will qualify for Patent Box relief.

Example 5: Packaging that is integral to the use of the product/system

In an instance where a company is selling a patented deodorant spray canister which contains a non-patented deodorant formula, the combined income from the sale of the packaging (canister) and the inner product (deodorant) is eligible for Patent Box tax relief, as the packaging itself is integral to the normal use of the application of the inner product. This is regardless of the fact there is no patent for the deodorant formula itself.

In contrast, selling a patented sandwich box containing a non-patented sandwich is a very different scenario. In this example, only the income attributable to the packaging and not the sandwich itself is eligible for Patent Box tax relief. This is because the use for the packaging is to extend the shelf life of the sandwich, whereas the normal use of the sandwich is for human consumption. Therefore, the packaging isn’t essential for the use of the sandwich per se, and only the percentage of income that is directly attributable to the packaging qualifies for Patent Box relief, rather than the whole sale.

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, Oliver McHugh ([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.