UK: Review of Intellectual Property, Patent Box And Tax

Last Updated: 29 August 2012
Article by Jackie Maguire

The Chartered Institute of Patent Attorneys recently invited two key Patent Box developers to speak at a seminar for its members and Jackie Maguire from Coller IP reviews discussions with the experts.

This review written by Jackie Maguire, Coller IP was first published in the CIPA Journal, July 2012, page 424.

The CIPA seminar, chaired by Simone Ferrara, RGC Jenkins & Co, provided key insights into the tax treatment of IP, R&D tax credits and the development and proposed implementation of the patent box.

Highlighting the key tax issues

Andrew Clay, Squire Sanders (UK) LLP provided guidance on how IP professionals could become aware of potential tax issues that may affect their clients. His advice is underpinned by 20 years experience in dealing with contentious and non-contentious IP matters and a history of being taught how to structure patent claims by his serial inventor father from the age of eight!

Andrew was quick to point out that patent attorneys and other IP professionals should not purport to provide tax advice, as incorrect advice may lead to justifiable negligence claims. However, the information provided in the session helped delegates to spot tax related issues, and therefore know when their clients should seek specialist advice. Moreover, delegates will now be able to identify opportunities for clients to reduce their tax bill and release funds for additional IP activities.

Andrew highlighted how the treatment of tax was important during assignment and licensing of IP and in the settlement of disputes.

Andrew highlighted how important it was to notify assigning or licensing clients of the possibility of VAT being payable and to advise them to take advice from their accountants. If a contract between two UK entities is silent as to VAT then the consideration is deemed to be VAT inclusive (section 19(2) VAT Act 1994). The assignor or licensor would then have to account for VAT with HMRC, and instead of keeping the full £1m consideration from a deal would only net £833,333: a pitfall to be avoided.

IP ownership can have significant tax implications further down the line from invention/creation, so it is important to think about these possible consequences early on before the IP acquires significant value. It was strongly recommended that company boards and shareholders who allow a director to solve a technical problem in his/her own time, proactively ratify that decision and officially record the decision before the invention is made, otherwise HMRC may assume that the company is the true owner. Again, the devil is in the detail and there are exceptions – so always refer to the experts.

If all of the above was too easy for some, then a session on withholding tax in the context of licensing highlighted extra complexities.

Many countries (including the UK) require tax to be deducted from certain payments and paid to the local tax authorities. Patent royalties and certain copyright royalties are subject to withholding tax in the UK. However, if the payee is a company that is resident in the UK – or if it is not resident but carries on trade via a permanent establishment in the UK, then there is no obligation to withhold.

Many double taxation treaties exist between countries which prevent a licensor being taxed twice and can lead to the reduction or elimination of withholdings altogether. Where there are double tax treaties, payments of license fees to foreign licensors can be made subject of a reduced withholding tax if there is a reasonable belief that the payee is entitled to the relief. In which case, it is important to ensure that the licensor warrants that he is not resident in the paying country and that he can rely on treaty relief.

VAT in relation to settlements becomes complex. For instance, if a patent attorney carries out services during litigation and his client wins, then he has to add VAT to his charges, but his client can't issue that vatable invoice to the opposition. Andrew has some words to add to service contracts to work around this situation.

R&D tax credits

Andrew provided a 'Calamari starter' on R&D tax credits on which the next speaker could elucidate, as Diarmuid MacDougall, PricewaterhouseCoopers (PwC) was responsible for the 'above the line' reporting enhancement to the scheme which will take effect from 2013. Diarmuid, who wrote the Treasury Working Group papers on major reforms of the R&D has worked closely with the Treasury on the patent box and R&D tax credits scheme.

To qualify for R&D tax credits a company must carry out R&D that seeks to achieve an advance in knowledge or capability in a field of science or technology. The R&D must be related to a company's trade – existing or intended and two regimes apply, one for small companies and one for large:

  • SMEs can claim for 100% of capital expenditure and from 1 April 2012, 225% of revenue expenditure. This means that for every £100 of qualifying costs the SME makes, it can have the income on which it pays corporation tax reduced by £125 in addition to the £100 it spent. A payable cash credit is available if the SME is loss making in the relevant accounting period at a claim rate of 24.75%. This credit can be used to pay for IP fees although sadly IP costs do not qualify for tax credits.
  • Large companies can claim 100% of capital expenditure and from 1 April 2012, 130% of revenue expenditure.

Patent box

Anna Floyer-Lea joined Diarmuid for discussions on the patent box which in principle will allow companies to benefit from a 10% corporation tax on net profits attributed to patents, whether the income arises within the UK or worldwide.

Anna is now a senior manager in PwC's patent box team having previously been responsible in HM Treasury for leading the team that designed and is now implementing the patent box. Royal Assent for the patent box is imminent with legislation coming into force in April 2013. In essence the patent is a 'switch' which puts all income from patented products into a box. A process formula is then applied to work out the tax due on these profits, including stripping out routine and brand-related profits to which standard rates apply.

There are a number of eligibility criteria to qualify for the patent box, in that the company must own intellectual property rights (IPRs) through patents or exclusive licensing agreements, have performed development activity in relation to those rights, be actively managing the IPR and have received income which is deemed relevant to the IPR held by the company.

Anna explained that the patent box will be phased-in over five years. It has the potential for very wide application and the entire product profit may be put in the box even if there is only one active patent covering a part of the product. Patents will qualify if they are granted at the IPO or EPO (wherever validated) or from a national office within a given list of other countries. All profits arising for up to six years before grant of patent qualify (from April 2013).

HMRC will look at internal controls and processes that are present in the company and the self assessment evidence to show that a product is covered by the patents. They may also call on patent attorneys for independent advice if there are disputes.

Anna provided examples to show how those companies with high margins will benefit most. There are a number of considerations to look out for and detailed choices to make.

The Patent Box will require companies to elect in if it is advantageous for them to do so within 12 months of account filing. If they opt out then they stay out for at least five years afterwards. Some challenging decisions ahead!

Coller IP is pleased to provide further information on the IP requirements of the Patent Box and is hosting a seminar for invited guests on 26th September 2012.

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.

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