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When Should you Elect In to the Patent Box?

A company must elect in to the Patent Box regime in order to take advantage of the reduction in payable UK Corporation Tax. For some companies there may be advantages in delaying entry into the Patent Box. This Briefing looks at this issue.

Electing In

A company may elect in to the Patent Box regime for profits earned in a particular accounting period within two years of the end of that period. If a company elects in to the regime all of its trade will be subject to the Patent Box. It is possible for a company to elect out of the Patent Box regime. It will then be barred from re- entering the Patent Box regime for five years.

As can be seen from the sample calculations in the Briefing “Patent Box – How to Calculate the Patent Box Benefit”, it is possible to make a Patent Box loss on a particular product, for example a product with a low profit margin. A Patent Box loss occurs when the calculation of relevant IP profits (which models the profit which is due to the qualifying IP right in a specific way which is defined by the legislation) is a negative number. Any Patent Box loss made in previous accounting periods in which the company has elected in will need to be set off against Patent Box profits made in subsequent periods.

Although it is not possible to claim a Patent Box benefit until after a qualifying IP right – typically a patent – has been granted, relief can then be claimed for profits made up to six years prior to grant (so long as the company has elected in for the accounting period in which those profits were made).

Electing In - Considerations

As it is possible to make a Patent Box loss, it is important to consider carefully whether to elect in to the Patent Box at all, and to plan the timing of any such election.

It is not uncommon for profits to be low or non-existent during the early exploitation of a patent. It may therefore be appropriate to elect in to the Patent Box at a point in the business life cycle when a Patent Box profit is available on the product(s) covered by a company’s patents. Any Patent Box loss will need to be set off against the Patent Box profit, so the Patent Box benefit may be greatly reduced or even eliminated as a consequence of having elected in to the regime too early.

01 February 2022

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