Patent Box

The Government is introducing a Patent Box from 1 April 2013, which will apply a reduced 10 per cent rate of corporation tax on profits attributed to patents.

The Government aim is that the Patent Box will create a competitive tax environment for companies to develop and exploit patents and other similar intellectual property (IP) in the UK. The Patent Box will provide an additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products. This will encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK's position as a world leader in patented technologies.

The Key points are:

·         UK businesses will be able to benefit regardless of how they use their patents - whether they are licensed, included in patented products, or used in internal processes or to provide services.

·         Worldwide income from existing as well as new IP will be included. To enable this, the full benefits of the Patent Box will be phased in over five years from 1 April 2013 i.e. 60% of the Patent Box benefit will be available in 2013/14 increasing to 100% by 2017/18.

·         In many cases the profit attributed to patents is calculated from total profits using a step-by-step method. This structured approach will increase certainty for businesses using the regime and reduce administrative burdens compared to requiring businesses to value each patent individually.

·         Smaller claims can benefit from a simplified calculation.

·         In response to business' comments on the June 2011 consultation, the Government has made a number of technical changes.

Overview of the Patent Box regime

The Patent Box is expected to benefit a large number of UK companies in a wide range of sectors. Businesses will be able to benefit regardless of how they use their IP - whether it is licensed to others, included in products they sell, or used in internal processes or to provide services. Worldwide profits from qualifying IP will be eligible for the reduced 10 per cent tax rate.

Qualifying IP includes patents granted by the UK Intellectual Property Office and the European Patent Office, as well as supplementary protection certificates, regulatory data protection and plant variety rights. It will also include 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 existing as well as new IP, and to acquired IP provided that the group has further developed the IP or the product which incorporates it.

In many cases companies will be able to benefit where they themselves have rights to the IP owned by others. A UK Patent Box company could, for example, own European rights to exploit a patent while the rights to other territories are held by other companies. Alternatively a UK Patent Box company may have rights to IP developed in collaboration with another company or a university.

Qualifying income includes:

·         sales income from patent protected products, including spare parts;

·         license fee or royalty income from licensing of patent rights;

·         patent right sale proceeds; and

·         patent right damages for infringement.

In calculating those profits to which the 10% rate will apply a three stage mechanical process has been identified involving:

Stage 1: Identification of relevant intellectual property (IP) income and profits;
Stage 2: Deduction of routine profit; and
Stage 3: Deduction of any IP profits relating to marketing intangibles.

Claimants will now have the option of performing a bespoke marketing intangibles valuation in order to arrive at a notional royalty amount to be extracted from residual IP profits giving the final patent profit figure to be taxed at 10%.

Companies which use their IP to perform processes or provide services will benefit from the Patent Box up to the level of an arm's length royalty for the use of the qualifying IP. The patent box regime will be phased in from 1 April 2013. This is a significant opportunity and there is time in 2012 to ensure that your company is best placed to use the scheme to its full benefit. A targeted anti-avoidance rule (TAAR) will apply and comprehensive guidance will be published in summer 2012.

For further information or advice on this topic please contact Ward Williams: http://www.wardwilliams.co.uk/