This is not just any box. This is an HMRC Patent Box

On 1 April 2013 the UK will introduce a new preferential tax regime, the so called “Patent Box”, that will potentially reduce the amount of UK corporation tax that a company will be liable for.

If you’re interested in finding out more, then grab a highly caffeinated beverage of your choice (we are going to be talking about patents and tax in the same post after all!) and read on.

What’s the patent box?

As noted above the patent box is a new tax regime for companies that are liable for UK corporation tax. Qualifying profits arising from the exploitation of certain qualifying patents will enable companies to apply a preferential corporation tax rate to those profits. The patent box is an optional regime and companies will need to elect into it.

What level of saving are we talking about?

Corporation tax is currently 24% (reducing to 23% in the 2013/2014 tax year). However, under the patent box regime a 10% tax rate will apply to qualifying profits from 1 April 2013.

So from April 2013 our corporation tax will drop to 10%?

Not exactly. The preferential tax rate will only apply to qualifying profits and there are also some eligibility criteria to bear in mind. Further, the corporation tax rate under the regime will not suddenly drop to 10% on 1 April 2013 but will be phased in over a period of a few years with the full benefit being available from the 2017/2018 tax year.

This all sounds rather generous. Why would the government do this?

The UK’s existing system of R&D Tax Credits gives enhanced tax relief for certain expenditure incurred in connection with R&D activities. By doing so, it aims to encourage creation of IP in the UK. However, there is currently no similar incentive for businesses to retain IP in the UK once it has been created. The government hopes that the patent box will encourage innovative businesses to invest in the UK and to locate high-value jobs and innovation-related activity here by making the UK an attractive tax jurisdiction. They also hope that it will encourage companies to locate their tax affairs and IP assets in the UK.

What types of income qualify for the patent box?

The relief applies to worldwide profits from patented inventions. The following types of income are regarded as qualifying: sales income (sale of products protected by a qualifying patent or products that include an item that is protected by a qualifying patent), licence fees/royalty income from qualifying patents, sale of qualifying patents, court awards arising from infringement proceedings.

What are qualifying profits?

In order to try and minimise the difficulties in calculating the qualifying profits there is a 3 stage process that determines the qualifying profits that can benefit from the tax regime. In stage 1 a proportion of qualifying income within a company’s total income is calculated. In stage 2 a routine return is deducted to identify a residual profit. Finally in stage 3 a further deduction is made to determine the residual profits that relate to patents.

I have a US patent, does that qualify?

No. The patent box regime will apply to patents from the UK Intellectual Property Office and from the European Patent Office (plus patents from some other EEA countries – Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden).

US patents (and others not on the above list) will not qualify under this regime.

My patents are pending, does this matter?

The patent box is only available in respect of granted patents though there is the possibility of back-dating benefits for currently pending applications when they eventually grant. However, you might like to consider acceleration of your patent applications to try and secure an earlier grant. As noted in an earlier post here the UKIPO can already grant patents very quickly and recently announced plans by Vince Cable may make this even quicker. The process can also be accelerated in Europe by requesting “accelerated prosecution”. Your patent representative will be able to advise further.

Does this change how we apply for a patent?

Possibly. Patents have traditionally been filed to protect your market, for licensing purposes or as a defensive means in negotiations. However, there is now an additional reason to consider patent protection – you may be able to obtain tax relief!

It will also be important that company documentation details the IP creation and protection process in a manner that will satisfy HMRC that the requirements of the patent box have been met. There may therefore be a need to review the documentation that you hold to maximise the chances of meeting the requirements. Your patent representative will be able to provide further assistance on this point.

Our company only has a patent to a part of the product we sell. How will that impact on the benefits we get from the regime?

The UK regime has been set up such that only one patent in a product is required for the whole product to qualify. So for example a patented mobile phone antenna would enable the profits from the entire phone to qualify for the regime.

Another thing to bear in mind is that items designed to be incorporated into a product will make the whole product qualify (so a patented printer cartridge will make the printer eligible).

Are there any other requirements I need to know about?

Oh yes! Companies will have to meet certain eligibility criteria, namely are they the owner or exclusive licensee of the patents and have they either developed the patents or been responsible for decision making relating to the development and exploitation of the IP. Whether a company meets these criteria (in particular in the instance of group companies) may not always be straightforward and advice from your tax specialists may be advisable to ensure you will be able to gain the benefits of the patent box.

Who is the Patent Box aimed at?

Many different corporations may be able to take advantage of the tax savings that the patent box may be able to deliver. For companies with an already existing and mature patent portfolio the patent box may be able to be applied straightaway. For companies that have filed patents in the past but have not filed as extensively as they could have done, e.g.  on the grounds of cost of the patenting process, then the patent box may provide an incentive to increase their filing programme. The patent box may also persuade companies that have never filed patents before to initiate a filing programme (though it should be noted that the patent box contains tax avoidance provisions).

So, what should I do now?

Speak to your patent representative and/or your tax representative!

Links/further reading

http://www.hmrc.gov.uk/budget-updates/march2012/patent-box-tech-note.pdf#page=1

http://www.ipo.gov.uk/types/patent/p-patentbox.htm

Mark Richardson         11 January 2013