Using patents for AI innovation to reduce UK corporation tax

There are actually several reasons why seeking patent protection for innovative AI functionality may be desirable. However, one often overlooked reason is the potential tax savings that a company may be due as a result of having patented technology.

 

The Patent Box regime in the UK is a tax relief on profits made from the exploitation of products or processes that incorporate patented technology. In particular, the Patent Box reduces the UK corporation tax payable on qualifying profits to 10% from the headline rate. With the headline rate increasing from 19% to 25% as of April 2023, then the potential tax reduction that may be available via the Patent Box has become even greater.

 

So, what are the main requirements to be eligible to claim relief using the Patent Box? To be eligible, a company must: be liable to UK corporation tax; make a profit from exploiting inventions covered by granted patents; own, or have an exclusive license for, the relevant patents; and, have undertaken qualifying development on the relevant patents. In practice, such qualifying development means that the company has made a significant contribution to either: the creation or development of the patented invention; or, a product or process incorporating the patented invention.

 

The patents in question must be granted by the UK Intellectual Property Office, the European Patent Office or by one from a particular list of European Economic Area countries. In order for a profit to be taken into account in the reduced corporation tax calculation, it must come from activities such as selling products or providing services that are covered by a patent or which incorporate a patented invention, and licensing out or selling the relevant patent rights.

 

A company that is developing and using innovative AI technology in devices that are being sold or in the provision of services could therefore benefit from reduced UK corporation tax liability via a suitable patent strategy around their AI innovation. Also, a company that is developing innovative AI functionality, but not using the functionality in the sale of products or provision of services themselves, could still benefit financially from obtaining patent protection, in particular via income generated from licensing out or selling the patent rights, and then in the Patent Box reduction on corporation tax due on the profits arising from such licensing or sale of patent rights.

 

AI companies that are operating in one or more of a wide variety of industries could therefore benefit from seeking patent protection even if they have not considered patents before. Such industries could range from Internet-based industries, such as cybersecurity and Cloud computing, through healthcare, financial and e-commerce industries, to the energy, engineering and manufacturing sectors.

 

Obtaining patent protection can be a relatively lengthy process – typically, 3 to 5 years – and involve some financial outlay. However, the Patent Box savings that could be available should in most cases more than cover the cost to obtain a patent. Also, while Patent Box relief cannot be claimed until granted patent protection is obtained, the tax reduction calculation can be back-dated to include the period that a patent application was pending prior to grant, making the Patent Box and patents eligible for Patent Box relief valuable indeed.