The aim of the Patent Box regime is to "provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products". It follows in the footsteps of other, similar regimes in Belgium, Luxembourg, the Netherlands and Switzerland.
Following a lengthy consultation, in which Smith & Williamson took part, the new legislation has been included in the Finance Bill 2012.
From 1 April 2013, companies will be able to elect to phase in a reduced rate of corporation tax to profits generated from qualifying patents and limited other forms of intellectual property (IP). Ultimately the rate will fall to an effective 10%. Transitional rules will phase the benefits in, with 60% of the rate reduction being available from 2013 and the full reduction from 2017.
Who, and what, qualifies for the regime?
Patents granted from the UK Intellectual Property Office (IPO) and the European Patent Office (EPO) are treated as qualifying, along with certain other IP rights. A company or group would need to either own or have an exclusive license in the patent.
The regime applies to new as well as existing patents; however for a company to be included it (or a group company) must have had a significant involvement in development of the patented invention or activity, or a product incorporating the patented item or activity.
The benefits of the Patent Box will be available through legal ownership and through holding a license to commercially exploit a patent. It will also apply to patents that have been developed through partnerships, joint ventures and cost-sharing arrangements.
Income from the following sources is treated as qualifying: " patent licensing and royalties
- sales income from the patent or patent protected products or parts
- patents used in processes or services
- patent right damages for infringement.
Income excluded from the Patent Box includes that arising from financial arrangements and arising before a patent is granted.
How to determine company income derived from patents
In order to calculate profits eligible for the 10% rate a three step process has been devised. The following notes simplify the approach somewhat.
1. Identification of relevant IP income and profits
This is generally found by apportioning the company's total taxable trading profit and expense between qualifying patent and non- qualifying income. In some instances, this may not be clear, for example, for services or processes and so 'notional royalties' may need to be calculated. It is therefore essential to begin thinking about how to determine which products will qualify and whether your management accounting information can determine the qualifying income.
2. Deduction of routine profit
A 'routine profit' is calculated by deducting a notional 10% return on certain operating expenses from profit determined in point 1 above.
3. Reduction for profit derived from other forms of IP
A business needs to identify how much of the profit from points 1 and 2 above is due to the patent and how much to other forms of IP. The treasury proposes that this is calculated by assuming that a company's annual research and development spend roughly equates to patent IP, and that marketing spend equals its non-patent IP. Therefore a ratio of the two can be used to establish patent- derived profits. This final split can be done using the value of marketing intangibles if this gives a better result. There are also generous 'small company' limits which can reduce the impact of point 3 for companies with smaller profits.
How can we help?
In order to maximise the benefit of the regime, it is worthwhile taking the time to consider the issue now. We can help with advice in the following areas:
- patent identification, in conjunction with patent attorneys including determining whether anything else can be patented
- determining qualifying income from patents on a 'just and reasonable' basis
- performing the three step calculation as detailed above
- general advice on Patent Box
- structuring of trading and other amounts to secure benefits
- planning for intellectual property in general.
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.