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What Is the Patents Allowance?

The Patents Allowance is a valuable tax relief available to businesses in the United Kingdom that incur capital expenditure on acquiring, developing, or maintaining patented inventions. This allowance provides a financial incentive for companies to invest in research and development (R&D) activities, fostering innovation and technological advancements. In this article, we’ll explore the Patents Allowance in-depth, discussing its benefits, eligibility criteria, and how businesses can make the most of this tax relief.

Understanding the Patents Allowance

The Patents Allowance is a type of capital allowance, a tax relief scheme that permits businesses to deduct a portion of their qualifying capital expenditures from their taxable profits. It falls under the broader category of intellectual property allowances, which also includes relief for other intangible assets like copyrights, trademarks, and designs.

Eligibility for the Patents Allowance

To qualify for the Patents Allowance, businesses must meet specific criteria:

1. Ownership or Licensing: The business must either own the patented invention or have an exclusive license to exploit it. This exclusive license can be obtained by acquisition, purchase, or through a contractual agreement.

2. Qualifying Expenditure: Eligible expenditures include the cost of acquiring, developing, or maintaining patented inventions. This encompasses not only the purchase price but also any subsequent expenses related to R&D or innovation in the patent.

3. Qualifying Patents: The patents in question must be granted by the UK Intellectual Property Office (UKIPO), the European Patent Office (EPO), or the relevant patent office of an EEA state. The patents should relate to the UK or another EEA state, as this allowance does not extend to patents granted in non-EEA countries.

4. Trading Income: The business must be actively engaged in a trade or business, making this allowance unsuitable for passive income generators like investment companies.

Benefits of the Patents Allowance

1. Tax Relief: The primary advantage of the Patents Allowance is the significant reduction in taxable profits. Businesses can deduct a portion of their qualifying patent-related expenses, lowering their overall tax liability.

2. Encouraging Innovation: By offering financial incentives for R&D and innovation, the Patents Allowance fosters technological advancements and creativity in businesses.

3. Competitive Edge: Companies that invest in patented inventions gain a competitive advantage in their respective industries. The allowance can motivate businesses to stay at the forefront of technology and protect their intellectual property.

4. Boost to the Economy: The allowance contributes to the overall economic growth and development of the UK by encouraging R&D investment and innovation.

Claiming the Patents Allowance

To claim the Patents Allowance, businesses should take the following steps:

1. Identify Eligible Patents: Identify the patents that meet the criteria for this allowance. Ensure that you have documentation to substantiate your claims.

2. Calculate Qualifying Expenditure: Determine the qualifying expenditure related to the acquisition, development, or maintenance of these patents. This includes both the initial purchase price and any subsequent costs related to R&D or innovation.

3. Report on Tax Returns: Include the qualifying expenditure in your company’s tax returns. Be prepared to provide documentation and evidence to support your claim if requested.

4. Consult with Experts: Due to the complexity of tax regulations and allowances, it’s advisable to consult with tax professionals or accountants experienced in intellectual property allowances. They can ensure that your claim is accurate and in compliance with the law.

The Patents Allowance is a valuable tax relief for businesses that invest in patented inventions and innovation. By reducing taxable profits and encouraging R&D, it plays a significant role in promoting technological growth and competitiveness in the UK. Companies looking to make the most of this allowance should ensure they meet the eligibility criteria and accurately report their qualifying patent-related expenses.