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When should you elect into the Patent Box?

Patent Box is an optional regime, so to take advantage of the reduction in Corporation Tax rate against the profits made from the patented invention, a company must elect into the regime within two years of the accounting period to which the election is intended to apply.

Once elected, all company trade becomes subject to the Patent Box. It’s important to note that it is not possible to benefit from Patent Box until a qualifying Intellectual Property (IP) right or patent has been granted; however providing the company has elected in, relief can be given for the profits in relation to the qualifying IP rights up to six years prior to the grant of the patent.

Should your company elect in to Patent Box?

With very attractive benefits, Patent Box seems an obvious choice, however there are some subtleties which are important to consider and timing is one of them. During the early exploitation of a patent where profits from a product may be lower than expected, it’s not uncommon to experience either low or non-existent profits, which would make a “patent-box loss”.

Now as much as loss is expected, unlike R&D tax credits the Patent Box regime does not offer any facility to “cash in” losses to HMRC and receive a payable cash credit in return. So, any Patent Box loss will either be carried forward and used to reduce future Patent Box profits, or used to reduce the Patent Box profits of other group companies in the current period. Meaning that the Patent Box benefit may be greatly reduced or even eliminated as a consequence of electing into the regime too early. It’s important to note that Patent Box losses should not be confused with a normal trading loss of a company which is relieved in the usual way.

As a rule of thumb an election would be best made at a point in the business life cycle, where profits exist on products that are covered by the patents. There is also a calculation that can be applied to determine whether you have a Patent Box loss or profit; this can be complex, but our Accountants and Tax experts will be able to advise you as to when to elect to ensure maximum benefit.

As much as you can choose to opt into the scheme at any point, the initial decision to elect into the Patent Box scheme will require some analysis of patent profit, and how that will fluctuate over the next few years.

If timed perfectly, your decision to elect will mean that the effect of Patent Box losses is minimised, and the future relief benefit available in full. So, don’t elect in too early… or too late! Speak to a member of our team today to discuss your company needs.