How to Apply for the Patent Box Scheme and the Financial Impact on SMEs

The Patent Box scheme is a valuable tax incentive that allows UK companies to apply a lower rate of Corporation Tax to profits earned from their patented inventions. This can significantly boost a company’s financial health, especially for small and medium-sized enterprises (SMEs) that rely on innovation. In this blog, we walk you through the Patent Box application process and explore the financial impact it can have on SMEs. 

How to Apply for the Patent Box Scheme

To qualify for the Patent Box scheme, your company must own or exclusively license patents granted by the UK Intellectual Property Office, the European Patent Office, or certain other countries. Additionally, your company must have developed or significantly contributed to the development of the patented invention. Identifying and tracking the income generated from the patented invention is crucial. This includes sales of patented products, licensing income, and income from the sale of patents. Ensure your accounting system can segregate this income from other business revenues. 

Next, you need to calculate the relevant profits attributable to the patented invention by deducting expenses directly related to the income, such as production costs, R&D (Research & Development) expenditures, and marketing costs. Under the Patent Box scheme, the applicable Corporation Tax rate on relevant profits is reduced to 10%. This is significantly lower than the standard Corporation Tax rate, providing substantial tax savings. To benefit from the Patent Box, you must elect to apply the scheme in your Company Tax Return. This election can be made for the accounting period in which the relevant profits were generated and must be submitted within two years of the end of that accounting period. Maintaining detailed records of all calculations and relevant income is crucial in case of an HMRC review or audit. 

The Financial Impact on SMEs

The Patent Box scheme can have a profound financial impact on SMEs by reducing their tax liabilities and freeing up capital for further innovation and growth. By applying the reduced 10% Corporation Tax rate to profits from patented inventions, SMEs can significantly lower their tax bills. This results in more retained earnings that can be reinvested into the business. The tax savings realised through the Patent Box can be channelled back into research and development activities, helping SMEs continue innovating, developing new products, and maintaining a competitive edge in the market. Lower tax payments improve cash flow, providing SMEs with the financial flexibility to manage operations more effectively. This can be particularly beneficial for start-ups and growing businesses that need a steady cash flow to sustain their growth trajectory.

Utilising Patent Box

Utilising the Patent Box scheme can give SMEs a significant competitive advantage by reducing costs associated with innovation and development, allowing them to offer more competitive pricing, invest in marketing, and scale their operations more rapidly. Demonstrating the ability to maximise tax efficiencies and invest in continuous innovation can make SMEs more attractive to investors, opening doors to additional funding opportunities and partnerships that further drive growth. The financial benefits derived from the Patent Box can contribute to the long-term sustainability of SMEs, enabling them to continually invest in innovation and maintain a strong financial position to weather economic fluctuations and remain resilient in the face of challenges. 

How can we help?

At TBAT Innovation, we are a leading consultancy specialising in R&D tax relief and grant funding and can provide invaluable assistance throughout the process. We offer expert guidance on applying for the Patent Box, ensuring your application is robust and compliant with all requirements. Our experienced team can help you track and calculate relevant income, prepare detailed documentation, and maximise your financial benefits from the scheme. With our support, you can strategically leverage the Patent Box to fuel your growth, enhance competitiveness, and secure a sustainable future. 

To conclude

The Patent Box scheme offers a powerful incentive for SMEs to leverage their patented innovations for significant tax savings. By understanding the application process and the financial impact, SMEs can strategically utilise the Patent Box to fuel their growth, enhance competitiveness, and secure a sustainable future. If you are an SME with patented inventions, consider exploring the Patent Box scheme to maximise your financial benefits and drive your business forward.

For expert guidance on applying for the Patent Box and optimising your tax strategy, contact TBAT Innovation today. 

Alternatively, you can book a free-1-2-1 consultation today with our Senior Consultant.