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The Patent Box Tax Regime

The Patent Box Tax Regime

Published: 16.05.13 at 11:40

On 1 April this year, the Government introduced a new tax regime offering substantial savings on profits related to "qualifying" patents developed or actively owned by UK companies. The changes are being phased in over five years, and by 2017 the rate of tax applicable to qualifying income on the exploitation of these patents will be as low as 10%. The intention is to "provide an incentive for [R&D and high-tech] companies in the UK to develop new innovative patented products" as well as encouraging multinationals to "locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK"[1].

So who will benefit from this tax break? There are three elements to the program: the rate applies to qualifying income received by a company with qualifying development on qualifying rights.

Qualifying income

The types of income that will benefit from the Patent Box are profits related to:

  • Worldwide sales of patented products or products incorporating patented inventions;
  • Use of a patent in business, eg using a patented manufacturing process or providing a service using a patented tool
  • Sale of patents;
  • Worldwide licensing of patents;
  • "Infringement income" (eg income from settlements); and
  • Damages, insurance or other compensation.

Clearly, the scheme is a broad one. "Worldwide sales" includes sales in countries where the item has not been patented, and "products incorporating patented inventions" will allow companies to exploit the income on multiple products off the back of one patent.

Qualifying development

Not all companies will be able to sign up to the regime. The Box is not intended to encourage multinationals to move their IP into an empty UK holding company, or to incentivise mere investment in patents for the purpose of licensing them out. The rules have been designed to "limit Patent Box to companies and groups which have been properly involved in the innovation lying behind the patent"[2]. Companies wishing to take advantage must be UK tax-paying and able to show:

  • "Qualifying development", in that it or another company in the same group contributed significantly to the patented invention, or performed a significant amount of its development;
  • That it owns or holds an "exclusive licence" to the qualifying IP right; and
  • If the development was carried out by another company in the group, that it has "active ownership" of the right.

The "exclusive licence" rule means that companies can elect into the rate if they enjoy the exclusive right, in at least one national territory, to develop and exploit the patent in question.  They must also have either the ability to bring infringement proceedings or the right to most of the damages from infringement.

"Active ownership" is intended to qualify companies that hold the rights but did not develop them.  They must play a significant role in management activities such as making portfolio decisions, formulating plans for product development, engaging in protection of the rights, and granting licences.

Qualifying right

The Box will automatically cover patents that are granted in the UK and by the European Patent Office, as well as those granted in certain other EEA countries. A full list can be found on the HMRC website.

It does not matter if the patents were granted before the scheme came into force, and although the benefits do not apply to pending applications, the scheme can be applied retrospectively so that profits earned in the six years before grant are covered and applied upon grant of the patent, not applying to profits earned before April 2013.

Once these conditions are fulfilled, complex calculations are done to adjust the income down to a figure called the "Relevant IP Profits" and the tax rate applied to this figure. In 2013 the rate will apply to 60% of this figure, increasing by another 10% of it every year until 2017 when 100% of Relevant IP Profits will be taxed at a rate of 10%.

The scheme is part of a broader range of measures designed to stimulate growth amongst innovative businesses. Its critics, however, fear "big companies will benefit more than small firms"[3]. The scheme does apply to overseas exploitation and larger, better-advised multinationals certainly seem to have warmed to it faster than their smaller rivals, with GlaxoSmithKline, for example, announcing new UK investment years before the scheme came in[4]. It will be several years before an accurate picture emerges of the benefits brought about by the Patent Box regime.

This article was written by  Haiyue Yu, a student at the University of Law.


[1] Quote from David Gauke, Treasury minister, 'Small companies urged to use Patent Box', The Telegraph (8th April 2013)

[2] Intellectual Property Office website (http://www.ipo.gov.uk/types/patent/p-patentbox/p-patentbox-qualify.htm)

[3] Quote from John Mitchell, chairman of the SME Innovation Alliance, 'Small companies urged to use Patent Box', The Telegraph (8th April 2013)

[4] GSK Press Release, 'Government patent box proposals 'transform' UK attractiveness for investment' (29th November 2010)

Photograph (some rights reserved) by vjconnor

 

Please note that this article discusses the legal position in the UK at the time of publication. It provides general information only but is not to be regarded as legal advice. You must take advice from a specialist lawyer in relation to your specific circumstances. Further, you should seek additional legal advice when dealing with parties based in other parts of the world or works originating from other parts of the world as the legal position may vary.

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