From April 2013, businesses in the UK holding (or in some limited
circumstances, licensing) patents and other similar related rights
will be able to enjoy a reduced 10% corporation tax rate on profits
attributable to their exploitation. James Arneill, of our
Commercial Team, considers the new Patent Box regime and how you
may take advantage.
The Patent Box – what is it?
The Patent Box is a new taxation regime, introduced
by the current Government with the aim of encouraging and
attracting innovation in the UK and consequently stimulating
growth. Profits from relevant patented technology will be
taxed at only 10%, thus encouraging companies with potentially
patentable technology to apply for and to subsequently exploit
patents here.
The regime will come into force on 1st April 2013 - when
60% of the benefit will be available - and will subsequently be
phased in over the course of the following five years, with the
full benefit being available from 2017 onwards.
Which patents is it available for?
The regime will currently apply to profits derived
from all patents granted by the UK Intellectual Property Office and
the European Patent Office. This will be the case whether
already granted at the time the regime commences, or granted
thereafter. It will also apply to patents granted by the national
offices of certain EEA States, which are deemed to have similar
patentability and examination criteria to the UK (around 13 at the
time of writing). The beneficiary will obviously have to be a
business which is subject to the UK taxation regime. The
regime will also apply to profits from certain related patent
rights such as supplementary protection certificates, and plant
variety rights.
Which technology will it apply to?
The regime will apply to any technology capable of
being patented, although if a patent is granted in respect of one
component of a larger product, the tax rate will apply to profits
derived from exploitation of the larger product in its
entirety.
Profits may be derived from licenses of the patent, or from direct
sales of a patented product (or a product containing a patented
component), or sale of the patent itself, or from use of patents in
internal processes or to provide services. Interestingly,
HMRC have indicated that eligible profits may also include sums
received from others accused of infringing the patent.
Licensees of patents may also enjoy the benefit of the regime,
provided that the licence granted is exclusive and at least
country-wide (and subject to the conditions explained below).
What other conditions apply?
The company must have undertaken "qualifying
development", by making a significant contribution to
either:
(a) the creation or
development of the item protected by the patent or
(b) a product
incorporating that item.
If the company is a member of a group, then in some circumstances
it may qualify if another group company has undertaken the
qualifying development, but only if it "actively manages"
the portfolio of qualifying rights. HMRC have indicated this would
have to require a "significant amount" of management
activity.
There are certain anti-avoidance rules also in place to prevent
parties:
(a) from granting
commercially irrelevant exclusivity in a licence, simply to take
advantage of the regime and
(b) from incorporating
commercially irrelevant patented components into products, to allow
the products to take advantage of the regime.
The Transitionary Period
The regime will have effect in respect of income
and gains from 1st April 2013, when the 10% tax rate
will apply to 60% of a company's "Relevant IP
Profits" (RIPPs), increasing to 70% of all RIPPs from
1st April 2014, 80% from 1st April 2015, 90%
from 1st April 2016 and the full benefit available from
1st April 2017.
If a company's accounting period falls either side of the
1st April of each year, then these percentages will be
applied to profits on a pro-rata basis, depending upon the length
of time in each year.
What can you do to take advantage?
The regime is designed to attract patent production
(including R&D) and exploitation resources to the UK, as well
as seeking to maintain existing resources in the UK. Any business
group with overseas branches or subsidiaries which own patents, or
patentable technology, should consider whether a transfer to a
UK-based company may be beneficial from a tax perspective.
Any overseas company which is about to embark on a strategy of
exploiting patentable technology, should consider whether it may be
preferable to do so from a UK-base.
Existing UK companies should consider whether now would be an
appropriate time to apply for a patent or patents in respect of its
technologies and/or to re-evaluate its existing exploitation
strategies in order to ensure that they take full advantage of the
regime.
UK companies will need to elect into the regime if they want to
benefit and should speak to their Accountants with this in mind, if
they decide to do so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.