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Clare Nicholason of European law firm Osborne Clarke explains the key parameters of the UK's patent box regime.
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What you need to know about the Patent Box
Clare Nicholson22 October 2012
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Why?
The Patent Box objective• Enhance attractiveness of UK tax system• Retain and attract innovative and high-tech
businesses to the UK
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What?
• Corporation tax is currently 24% (↓ to 23%)
• Patent Box: Corporation tax on certain profits will reduce to nearly 10% eventually
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10% … eventually
• Tapered implementation from 1 April 2013
• Introduced initially at 60% of full relief
Tax year 2013/14 2014/15 2015/16 2016/17
Introductory rate
60 70 80 90
Effective CT %
15.2 13.6 12.4 11.2
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10% … nearly
• Tax year 2017/18: CT at 10%? Not quite…
• Once you've calculated the profits that are eligible for the Patent Box, there are some deductions before you apply the Patent Box rate of CT:
– "Routine return figure" (10% mark-up on certain expenses)
– "Marketing returns figure" (profits that result from brand value)
• These deductions are intended to isolate profits that result from the patented technology itself (and not from "run of the mill" commercial or marketing activities)
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Who?
A company can elect into the Patent Box if it:
• is liable to corporation tax;
• makes a profit from exploiting qualifying IP;
• owns or exclusively licenses-in qualifying IP; and
• has undertaken qualifying development in relation to qualifying IP.
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Which profits?
• Profits passing through a UK company that is paying corporation tax
• Profits relating to products or services that are covered by qualifying IP
• Worldwide sales
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Which profits?
23%
10%
23%
23%
Total company profits
Non-patented products Patented products
Profit attributed to non-qualifying income
Patent Box profit
Profit attributed to marketing assets
Profit attributed to routine activities
Source: HMRC
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What IP is covered?
• UK patents
• European patents
• Patents granted by some other EU national patent authorities
• SPCs
• Regulatory data protection
• Plant variety rights
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Owned and licensed IP
• A company can qualify for the Patent Box if they own or hold an exclusive licence for the IP
• Owned IP: Groups qualify for the Patent Box where IP is held centrally but actively owned and managed by a UK group company. Here, a UK company will fall within the Patent Box if it has the rights to use, sell or license the invention and to receive the profits related to that IP under a group agreement.
• Licensed IP: Claim Patent Box relief on the royalty stream from an exclusive licence.
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Old, new and acquired IP
• The Patent Box applies to existing, new and acquired IP, provided that the group:
– created or developed that IP; or
– in the case of acquired IP, further developed that IP or the product which incorporates that IP.
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Other requirements…
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Development criteria
• Active development
– creating, or significantly contributing to the creation of, a patented invention;
– Performing a significant amount of activity to develop a patented invention, any product incorporating the patented invention in it; or
– a process incorporating the patented invention.
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Active ownership criteria
• Only applies to group companies
• A Patent Box company must be actively involved in the development or management of the qualifying IP:
– planning and decision making activities associated with the development or exploitation (e.g. whether to maintain protection in particular jurisdictions and whether to grant licences)
– research alternative applications for the innovation
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What income is covered?
• The Patent Box rate of corporation tax will apply to 'qualifying income' produced by qualifying IP
• Qualifying income:
– licence income;
– income from the sale of products incorporating a patented invention;
– notional arm's length royalty income for using qualifying IP in a process or services; and
– income from infringement of IP rights.
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Narrow patents for patent box purposes?
• File patent applications of 'narrow' scope and more succinct description
• Reduces potential for the patent to be used commercially, but…
• …substantially increases the prospect of patent grant (and may also reduce the overall patenting costs)
Any questions?
