As businesses continue to innovate and create new products or software, the licensing of intellectual property (IP) rights becomes an attractive option – allowing patent holders to grant others the right to develop and utilise their patented technology in exchange for royalty payments.
Can companies leverage the value of their IP even further and claim Patent Box tax relief on the income they make from licencing their patent? The answer is yes! Read on…
What is IP right licensing income?
IP right licensing income refers to the revenue generated by a company from licensing its patented products, processes or software to other businesses for use or development. Instead of directly selling products covered by patents or similar rights, the patent holder chooses to license out their technology to third parties. These license agreements typically involve the payment of royalties from the licensee to the licensor.
Benefits of licensing your inventions:
Licensing inventions can be highly advantageous, especially for smaller companies that may lack the resources to manufacture or scale up production of their patented products. By licensing out their technology, these companies can generate revenue without bearing the costs of large-scale production.
What is Patent Box?
Patent Box is a tax relief scheme offered by the UK government to encourage innovation and the commercialisation of patented inventions. It allows eligible companies to apply a reduced Corporation Tax rate of 10% to the profits derived from patented income.
Does income from a licence of a relevant IP right qualify for Patent Box?
Yes, companies can claim Patent Box relief on income from the licensing of a relevant IP right. "Relevant IP income" includes any license fees or royalties received under an agreement that grants another party the right to use or develop any qualifying IP right held by the company. Therefore, any royalties received in relation to qualifying IP rights will be considered "relevant intellectual property income" and can be eligible for Patent Box relief.
Benefits of claiming Patent Box on licensing income - Case study:
Licensing income can be particularly lucrative under the Patent Box scheme, because once the invention has been created, there is little cost to generating the licensing income and so it is highly profitable.
Additionally, being savvy in planning when to elect into Patent Box, can yield some very worthwhile results for companies.
For example:
- FY2019 to FY2021: Company conducts R&D to establish new invention, and incorporates this into a product design. It subsequently files a patent.
- FY2022: Now that R&D costs have been incurred it elects into the Patent Box scheme in FY2022 so the previous year’s costs do not need to be included in calculating Patent Box profits.
- FY2022 to FY2024: Company licenses patents out to other companies and receives licensing income. It generates some small amount of cost in arranging the licenses but nothing after this point and so has an extremely high profit margin.
- FY2024: The patent is granted, and the company can claim Patent Box relief for profits generated in FY2022, FY2023, and FY2024.
Conclusion:
The key advantage of licensing income is that companies normally need around £200k profits to make a Patent Box claim worthwhile, and given normal profitability of selling a product including manufacturing costs, would probably require around £1m income to be related to patents (20% profit margin). If it is licensing income, then we would only need around £200k income which makes the barrier to claiming a lot lower.
We can help.
The Patent Box presents an opportunity for companies to significantly reduce their tax liabilities on profits derived from IP-related sales or licensing income. However, determining the optimal time to elect into the scheme and accurately calculating the eligible benefits can be complex. Professional assistance is recommended to ensure accurate calculations and compliance with the scheme's requirements.
Visiativ, Make UK’s Innovation Funding Partner, can help. Their services include assessing your existing IP portfolio to identify qualifying products or processes for Patent Box relief. they will also prepare the relevant figures and the Patent Box report for inclusion in your tax return.
For more information please call Sandy Findlay on 07807 739033 or email [email protected]