Sectors

Services

Background
28 August 2013

The Patent Box; Making Intellectual Property Valuable From A Tax Perspective

Any innovative and profitable UK company paying UK corporation tax should be aware of the new Patent Box tax incentive introduced on 1st April 2013. The government has introduced this scheme with the specific aim of fostering and encouraging innovation in the UK in order to stimulate economic growth. Under the Patent Box legislation, a profit made on sales of a product incorporating a patented invention may be taxed at a reduced rate of corporation tax. Once fully phased in by 2017, this will be 10% (from the usual 23%).
The Patent Box should provide a greater incentive for a company to protect more of their intellectual property as well as encourage them to invest more in research and development of new products and processes that can be protected with patents and on which tax relief can be sought.

Audits and applications

A company that already holds patents should carry out an audit to assess whether any of them cover commercial products on which UK corporation tax is being paid. Consideration should then be given to making a claim for this potentially valuable tax relief.
A company paying UK corporation tax that does not tend to file patent applications may now want to think again and take steps to seek patent protection for any new technology currently in the pipeline. In addition to the usual protection against copying that the grant of a patent can provide, there is now a potential tax advantage to consider which can significantly reduce the cost of seeking patent protection. For successful products, the tax saving may outweigh the cost of obtaining the patent in the longer term.
Many companies doubt that patent protection is available for their new ideas, but a patent may be obtained for relatively small modifications or improvements to existing products or processes.  A good test is to consider whether a new or improved product or process provides an advantage over an existing product or process that is already on sale or known. If so, then a patent application covering it has a better chance of being granted, especially in the UK, where the degree of inventiveness required to satisfy a UK examiner and obtain the grant of a patent is relatively low.

In most instances it is desirable to draft a patent application to cover an invention in the broadest possible terms to prevent a competitor making minor changes that would enable them to copy the product and avoid infringement. However, drafting the application so as to cover a particular product or process in more specific terms upon filing may result in quicker grant, reduced cost and a patent that is more resistant to third-party attack.  Once granted, the patent will enable a company to take advantage of the Patent Box and the tax savings that it provides straight away.

Worldwide profits

It is important to appreciate that it is not just profits obtained as a result of selling the patented product in the UK that qualifies for relief under the Patent Box; those obtained as a result of selling the product anywhere in the world are also included. As long as UK corporation tax is paid on the profits obtained as a result of the sales of a product, it is irrelevant whether those sales were made in the UK or overseas.

Overseas protection

The filing of a UK national application is almost certainly the best approach for a UK company seeking Patent Box tax relief, as the official fees are very low.  However, a UK patent is not essential as a European patent or a national patent granted by many of the other Member States of the EU also qualify under the Patent Box legislation. Although corresponding foreign patents are essential if a company wishes to protect its invention against infringement abroad, they are not required for the purpose of obtaining relief under the Patent Box.

If, as mentioned above, a UK patent has been granted relatively quickly as a result of drafting the specification to cover a particular product or process in more specific terms upon filing and patent protection in the US is important, then a reciprocal scheme termed the ‘Patent Prosecution Highway’ can be used to accelerate the examination of a corresponding US patent application. Under the scheme a US examiner will rely on a favourable opinion that has already been reached by the UK examiner, and so a US patent may be issued much sooner and for much less cost than would otherwise be incurred as a result of following the normal prosecution route. A similar approach can also be taken if patent protection is to be sought in Germany, Japan, China or Canada.

Pending applications

Although a claim for tax relief can only be made once a patent has granted, it is possible to include profits obtained up to six years prior to the date of grant. In this way, tax relief under the Patent Box can be obtained for profit derived from sales of a product made whilst a patent application is still pending.

Extent of the relief

It should be remembered that Patent Box tax relief is applicable to the profits from the sale of a larger product that incorporates a patented component when that larger product is sold by the company that either owns, or has been granted an exclusive licence to, the patent for the component.

Whilst there are some avoidance provisions that apply to prevent the spurious addition of components to a product purely to claim the tax benefit, this means that if, for example, the product being sold was a vehicle and the patent covered only the gearbox, it should be possible for a company that sells the vehicle and also holds a patent for the gearbox to claim tax relief on the profits obtained as a result of selling the entire vehicle and not just in respect of profits obtained as a result of selling the gearbox.

In addition to the profits derived from the sale of a product, it is also possible to obtain Patent Box tax relief for products that are made using a patented process. In this case a notional royalty rate will be used to calculate the level of tax relief due.

  Eligibility

A company claiming relief under the Patent Box must be actively involved in the management of the intellectual property by, for example, by making a significant contribution towards the creation or development of the invention covered by the patent. This provision excludes passive intellectual property holding companies from taking advantage of the Patent Box provisions.

Licensing arrangements should also be carefully considered. Provided the holder of an exclusive licence pays UK corporation tax, they can still claim the benefit provided by the Patent Box in the same way as a patent holder.

If the patent holder is part of a group of companies and the development that led to the patented invention or its application was carried out by another company in the group, then the patent holder will still qualify for Patent Box tax relief as long as they take an active role in the ownership of the intellectual property and are actively involved in any decision making connected with the exploitation of the patent. Thought must therefore be given to who should own any intellectual property created by a company or a member of a group of companies and appropriate steps taken to transfer any existing rights, should it be necessary to do so.

Companies based outside the UK should not ignore the Patent Box if they have a UK based subsidiary, as the subsidiary should still be able to take advantage of Patent Box tax relief, even if the development which led to the patented product was made by the parent company overseas. In these circumstances, the UK based subsidiary would need to either own the intellectual property or be granted an exclusive licenced under it by the parent company. The UK based subsidiary would also need to be earning income from the sale of the patented product on which corporation tax is due and, as previously mentioned, maintain an active role in the ownership of the intellectual property.

A company that already claims corporation tax relief in the form of Research and Development tax credits may still elect into the Patent Box regime and will not be penalised, as any additional deduction for research and development expenditure is not included in the apportionment of profits for the calculation of the available Patent Box tax relief.

Calculating possible tax relief

Whilst there are some calculations that must be made to determine the income that is eligible for the reduced tax rate (which is outside the scope of this article), the Patent Box legislation does attempt to make the process as simple as possible, especially for a smaller business. It should not simply be assumed that the additional advisory costs and administrative burden involved in claiming the Patent Box tax relief will outweigh the ultimate benefit.  Your tax adviser will be able to help you calculate the amount upon which you will be able to claim tax relief.  Further information about how to claim the relief can also be obtained from HM Revenue & Customs (www.hmrc.gov.uk).

Conclusion

With the very broad definition of the products that may qualify for Patent Box tax relief and the fact that it includes profits on sales made anywhere in the world, companies and their subsidiaries subject to UK corporation tax may want to rethink their IP strategy and protect their technology with the generous tax reduction incentives provided by the Patent Box in mind.   
 

Our services

We can assess an existing IP portfolio with a view to determining whether an organisation holds valuable intellectual property from the perspective of obtaining relief under the Patent Box. We are also able to provide advice on whether new patent applications should be filed to protect any undisclosed technology that a company may be in the process of developing, as well as advising on any ownership issues. We are happy to work closely with a company’s existing tax advisers to ensure that due consideration is given to obtaining the tax relief available under the Patent Box legislation and cost-effective and worthwhile protection for new technology is sought.

Share