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2nd May 2012

Geldards LLP: Expert Advice on the Patent Box

The Patent Box

The Government has been trailing its proposals to introduce a ‘Patent Box’ in the UK for the last 12 months and draft legislation was published in the Finance Bill 2012 just before Easter. The UK Patent Box, which will be phased in over five years, will mean that UK profits from patented inventions only pay 10% corporation tax, compared to the standard 23% that will be payable at the time it goes live on 1 April 2013.

The Government’s aim is to provide the most competitive corporation tax system amongst the G20 countries and the Patent Box creates a competitive tax environment to encourage companies to develop and exploit patents, and other intellectual property rights, in the UK.

This is great news for British business because it also includes companies who use patented items in products they develop or manufacture as well as ones that develop them – and it’s not just limited to the high tech sector.

What type of IP will qualify?
The Patent Box will apply to certain qualifying intellectual property (IP) rights including all active:

  • UK patents
  • patents granted by the European Patent Office
  • supplementary protection certificates, regulatory data protection and plant variety rights
  • patents granted by other EU Member States that have comparable patentability criteria and search and examination practices to the UK.

The Patent Box will apply to patents that are owned by the company and to those where the company has obtained an exclusive licence and develops the patented idea or incorporates the patented item in products.

The patent has to be actively owned and managed by a UK company, meaning that the Patent Box can’t be used by ‘patent trolls’, which are companies that
acquire patents but only to monitor infringements rather than to develop or use them.

It’s important to remember that the Patent Box will not apply directly to profits from IP protected by trademarks, design rights or know-how, so it’s important to be able to distinguish between the sources of profits, which may be tricky.

What profits will benefit?
A proportion of the corporation tax profit of the company’s trade will benefit from the 10% corporation tax rate of the Patent Box. This will include:

  • Income from the sale of qualifying patented items, or products that incorporate a qualifying patented item.
  • Licence fees and royalties from the grant of rights granted over qualifying patented rights, including rights resulting from the grant of an exclusive licence, such as trademarks, designs and know-how which are linked to the patent and which are required in order to use the patented item.
  • Proceeds from the realisation of a qualifying patent, such the disposal of the patent or the grant of an exclusive licence.
  • Income received from an infringement right where someone has breached a patented right.

It’s got a wide catchment area
The initial application of the Patent Box could be quite wide. For example, the extension of the Patent Box to items that are designed to be incorporated in a qualifying item could mean that the Patent Box applies to goods which merely incorporate a small element that has been patented. For example, if a printer uses a patented print cartridge, the whole printer will qualify under the Patent Box, as will the printer cartridge when they are sold together as one item. If the printer is patented but the cartridge is not, cartridges sold on their own will still qualify for the Patent Box as they are items designed to be incorporated into that printer. It will be interesting to
see how the rules apply in practice in complex pieces of machinery.

The Patent Box will also apply to profits in the six years before the patent is granted, which means that profits from any ‘patent pending’ period will also be included in the favourable tax regime.

The tax calculation
The tax calculation itself is fairly complicated, with a set formula for calculating the amount of profits within the Patent Box regime. Deductions will be made from the patent income for certain costs incurred by the company and adjustments will be made to ensure that the company retains the benefit of any research and development tax credits. So you’ll have to follow the Patent Box calculation closely to benefit from that 10% tax rate.

It includes anti-avoidance rules to prevent businesses from exploiting the Patent Box as a way of avoiding tax. Companies won’t be able to incorporate a patented item in a product solely to claim the benefit of the Patent Box, nor will they be able to create artificial mismatches between the expenses of creating the IP and the profits from exploiting the IP rights.

Steps to take now
If you want to take advantage of the Patent Box, you will have to apply as it won’t happen automatically.
You can also opt out of the regime at a later date if you want. If you can spot potential, we suggest that you:

  • Identify the patent items that could benefit.
  • Consider getting patents for IP where you might not have thought it worthwhile before
  • If you are a licensee, make sure that your licence grants you exclusive rights to the patent in the country or territories where you
    are developing the product.
  • Consider rearranging your patent ownership to make sure it satisfies the Patent Box regime. If you own patents overseas, check how the proposed UK regime will compare.

There may be more changes to come before April 2013, but the Government’s made a number of positive changes to the legislation since the
consultation last Summer and the Patent Box regime is a good step in the right direction in increasing the tax competitiveness of the UK.

If you want to know more about the Patent Box, please contact Andrew Evans.

Andrew Evans
Partner, Tax, T :             +44 (0)2920 391 761
E : andrew.evans@geldards.com