• The Patent Box - 10% Corporation Tax from April 2013

    The UK Government has recently published the result of the Consultation on the Patent Box tax incentive, which is an initiative aimed at incentivising companies in the UK to retain and commercialise existing patents and to develop new innovative patented products.  The incentive is a reduced rate of corporation tax.  Nominally, the reduced rate is 10% (instead of the usual rate of 26%), which is a figure that has generated some excitement since it was first announced.  The consultation paper clarifies that in most cases the overall tax rate will not be this low, for reasons set out below.

    The reduced tax rate applies to profits earned from patented inventions.   It will apply from the fiscal year starting on 1 April 2013.

    The consultation process is open until 2 September 2011 (see http://www.hm-treasury.gov.uk/d/consult_patent_box.pdf) and draft legislation is expected for the autumn of this year.

    Requirements for benefiting from Patent Box

    The Patent Box will apply to worldwide income earned by UK businesses from inventions covered by a currently valid qualifying patent, which is any valid patent granted by the UK Intellectual Property Office (IPO) or the European Patent Office (EPO).  The requirement applies to the invention, not to the patent per se.

    Patent Box applies only to qualifying income above a "routine" cost-plus margin

    The reduced tax rate will apply to the proportion of total income that qualifies by virtue of being derived from inventions that are patented ("qualifying income" - see below). Non-qualifying income is taxed at the normal rate.

    Costs will be apportioned on a pro-rata basis according to qualifying and non-qualifying income. Disappointingly, the resulting profit on the qualifying income is not to be simply taxed at the reduced rate; instead the Treasury proposes a somewhat more complex calculation that assumes a "routine" profit that would have been earned even without the benefit of the patented invention.  This profit is to be calculates in a "cost-plus" basis, using 15% of cost as a proposed mark-up. Only profits over and above that level benefit from the reduced tax.

    In other words, the initiative only benefits companies that can generate profits in excess of the proposed "cost plus 15%" margin. Only the marginal extra profit benefits from the reduced tax.

    Qualifying income

    Examples of the types of income that qualifies are:

    • royalties or licence fees: for use of an invention covered by a currently valid qualifying patent;

     

    • income embedded in products, such as:

    - sale of any product incorporating at least one invention covered by a currently valid qualifying patent;
    - licensing of bundle of intangible assets genuinely related and licensed as a single product;
    - compensation and damages paid by third parties for infringing qualifying patent;

    • sale of patents;
    • pre-grant income: income arising up to four years before grant of patent

    Income from financial arrangements, North Sea Ring fence incomes and services are excluded from the Patent Box.

    Other IP rights (such as SPCs, regulatory data protection, plant variety rights) can be included in the Patent Box.

    Beneficiaries of Patent Box

    The Patent Box will be accessible to a legal owner of a patented invention and/or an exclusive licensee.  Companies in partnership, joint venture and cost-sharing arrangement could benefit from the Patent Box if they:

    • remain actively involved in the ongoing decision making connected with the exploitation of the patent; and
    • have performed significant activity to develop the patented invention or its application.