Strategy

How IP ownership structure affects your Patent Box entitlement

·6 min read

Where intellectual property is held, and by whom, has a direct bearing on whether a company can access Patent Box relief. We examine the key structuring considerations for UK businesses.

One of the most common reasons companies fail to access the Patent Box is not that they lack qualifying patents. It is that the patents are held in the wrong entity. IP ownership structure has a direct and material impact on whether a company can make a Patent Box election, and on the quantum of relief available.

The Patent Box rules require that the claimant company either owns the qualifying IP outright, or holds an exclusive licence in respect of it. A non-exclusive licence is not sufficient. Where patents are held by a parent company and licensed down to operating subsidiaries on a non-exclusive basis, those subsidiaries will not be able to elect into the Patent Box.

For group structures, it is therefore important to consider whether IP should be held at the level of the entity that generates the qualifying income, or whether an exclusive licence arrangement can be put in place. Both approaches can work, but each has different implications for transfer pricing, withholding tax, and the nexus calculation.

The nexus approach adds a further layer of complexity. Even where a company holds the patent and generates qualifying income, the proportion of profits eligible for the 10% rate is scaled by reference to the ratio of qualifying R&D expenditure to total expenditure on the development of the IP. Expenditure on R&D subcontracted to connected parties is treated less favourably than expenditure on arm's length contractors or in-house R&D.

Companies considering restructuring their IP holdings should take care to ensure that any transfer of patents between group entities is undertaken at arm's length and properly documented. HMRC has the power to challenge arrangements that appear to have been entered into primarily for tax purposes, and the Patent Box rules contain specific anti-avoidance provisions.

Early-stage businesses should consider IP ownership from the outset. Ensuring that patents are applied for and granted in the name of the correct entity, and that employment and contractor agreements properly vest IP ownership in the company, can avoid costly restructuring at a later stage.

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