The Patent Box – Pay Less Tax On Profits From Patents
06 July 2011 Category News, Patents, Designs & Copyright
The Patent Box is one of several planned tax reforms that are relevant to intellectual property (IP). It is due to take effect on 1 April 2013, and will allow companies to pay corporation tax at a reduced rate of 10% on profits arising from products protected by UK or European (EPC) patents. The Patent Box is intended to make the UK tax system more attractive for innovative companies. It is hoped that this will encourage investment in the UK, across a wide range of technologies, leading to economic growth and the creation of jobs.
The final consultation document has been published and responses are due by 2 September 2011. Draft legislation will follow and the Patent Box is due to come into existence on 1 April 2013. It was originally proposed that the Patent Box would be available for all patents first commercialised after 29 November 2010. As an alternative, it may be that the Patent Box will apply to patents in existence on 1 April 2013; with the 10% tax rate being phased in over a five year period as follows:-
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A decision as to which of these approaches is to be adopted will be taken following the current consultation process.
In order to qualify for the Patent Box, the patent must be either a UK national patent granted by the UK Intellectual Property Office (UKIPO) or a European patent granted by the European Patent Office (EPO). The reason for this is that such patents are examined before grant and so they are more likely to relate to genuine inventions than are patents granted without examination.
Supplementary protection certificates, plant variety rights and certain regulatory data for agrochemical/pharmaceutical products will also qualify. Other forms of IP, such as trade marks, registered designs and copyright are excluded.
The patent must be granted and in force. When the patent expires or if it is revoked, entitlement to benefit from the Patent Box will end. As long as a European patent remains in force in at least one country (even if it has been revoked or allowed to lapse in the other countries in which it was validated), the benefit of the Patent Box still applies.
The Patent Box will be available to companies that are liable for the payment of UK corporation tax. They may be the sole proprietor of the patent concerned or the holder of an exclusive licence under the patent. In the case of joint proprietorship, the party or parties claiming the reduced tax rate under the Patent Box must each “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”.
The worldwide income earned by the company from an invention that is protected by the UK or European patent will benefit from the Patent Box (regardless of whether or not corresponding patents exist in other countries around the world).
Income qualifying for the Patent Box will include that arising from:
• The sale of products incorporating one or more inventions covered by the patent.
• The sale of spare parts for such products.
• Royalties received for the use of an invention covered by the patent (regardless of whether the invention is used by the licensee in an industrial process or incorporated into products).
• Damages paid by third parties for infringing the patent.
• The sale of the patent.
In the case of a patent relating to a process, income from a licence to use that process would qualify. If a company uses its own patented process, a notional arm’s length royalty may be calculated (under a set of rules known as “divisionalisation” to allocate the ownership and use of the patent to different parts of the business).
The reduced tax rate cannot be claimed before the patent has been granted.
It is proposed that, once a patent has been granted, the company will be entitled to claim the benefit of the Patent Box for any income that arose for up to four years between the filing date of the patent application and the date of grant.
Calculation of Profit
The reduced 10% tax rate will apply to the net profit attributed to the patent concerned (not to gross income). In order to reflect the fact that the existence of a patent can be expected to produce higher profits than would be made by companies without a patent, the amount of this additional profit (the “residual profit”) is to be calculated by deducting 15% from the profit attributed to the exploitation of the patent. Finally, it will be necessary to apportion the residual profit between that which arose from the patent and that which is due to other forms of IP (such as a strong trade mark). While smaller companies will be able to adopt a standard 50% apportionment, larger companies will need to calculate the actual contribution made by the other forms of IP.
The Patent Box is generally to be welcomed by patent proprietors, although it remains to be seen whether it will achieve its objectives in boosting the economy. In particular, it seems likely to become an important consideration in future patent filing strategies (for example, with regard to the countries in which a European patent is validated and whether, in view of the fact that prosecution before the EPO can take many years, to take advantage of the “fast track” procedure available at the UKIPO for obtaining the grant of a UK national patent as quickly as possible).
Find out further information about patent funding sources.