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.