How to use the ‘Patent Box’ regime to cut your corporation tax
Under the Patent Box regime, companies with qualifying intellectual property could dramatically boost profits. Here’s how
The reduction in corporation tax for patent income is designed to make UK’s tax system more competitive and appealing as a place for business innovation and growth. The ‘Patent Box’ regime gives companies a new incentive to protect and commercialise their patents.
The Patent Box regime applies a 10% corporation tax rate to profits attributed to patents by 2017 and this will occur in stages: in April 2013, 60% of the benefit will be phased in, increasing by 10% per tax year until April 2017, at which point the fully reduced 10% rate will be effective.
Qualifying for tax relief
In order to qualify for the tax relief a company must hold a Qualifying Patent (either granted by the UK Intellectual Property Office, the European Patent Office, or in an EEA state which has similar patentability criteria to the UK) or an exclusive licence for such a Qualifying Patent.
Patent applications that are only pending, which can regularly take three to four years to full grant, are not eligible for this relief. However, provided that a company with a pending patent application elects into the regime (which is due to apply to accounting periods beginning on or after 1 April 2013), the reduction in corporation tax may be back-dated up to six years prior to grant.
Crucially, the new regime will only apply to companies and groups that have been properly involved in the underlying invention in the patent. The company claiming the benefit of the reduced tax rate (or another member of the same group) must show that it has carried out development activities in relation to that invention (the “Development Condition”).
Where the company is a member of a group and only meets the Development Condition because of the activity of a fellow group member, the condition of “Active Ownership” must also be met – the company holding the patent rights needs to perform a significant amount of operational activity in relation to managing those rights, despite the fact that some or all of the development will actually be undertaken by a fellow group company.
The extent of the relief
When calculating the Patent Box profits, a surprisingly wide variety of income sources are brought into account, making the regime much more advantageous than one might have first thought. In particular, the following are included as “Relevant IP Income” for the purposes of the relief:
- Proceeds or royalties from the sale or licensing of the patent or patented invention
- Proceeds from the sale of goods (e.g. spare parts) which incorporate the patented invention or which are designed to be incorporated into the patented invention
- Damages and settlement funds from patent infringement actions.
In addition, companies using qualifying patents in the provision of services or in their business processes may designate a proportion of that total income as Relevant IP Income.
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Moving forward this new regime, along with associated research & development incentives available, firmly places the UK on the map for the holding of IP rights and, in particular, patent rights.
You should review your current IP holding structures and patenting strategies as soon as possible as you may be able to take advantage of this new regime and maximise those benefits by optimising licensing arrangements and identifying hidden value in patents.
Gary Hopkins is a professional support lawyer in the IP & Commercial team of Farrer & Co. For more information, visit www.farrer.co.uk/intellectual-property-copyright