Cerys Wyn Davis, partner at Pinsent Masons LLP goes through the workings of the Patent Box – a new way for businesses to gain tax breaks on innovation.
The Patent Box (PB) regime, introduced at the start of this month, gives a lower tax rate for profits earned by UK companies from commercialising patented and certain other inventions.
It applies to new and existing patents, with the benefits phased in over the next five years, leading to a tax rate of 10% by April 1 2017.
This could provide significant tax savings to manufacturing companies involved in research and development and who own or license patented inventions or products.
The PB is key to the UK government’s ongoing strategy to attract innovative companies and high value jobs associated with the development, manufacture and exploitation of patents into the UK.
The PB applies to companies based in the UK which hold “qualifying IP rights” or are exclusive licensees of qualifying IP rights – providing they satisfy certain conditions relating to the development and management of such rights.
Want to take advantage of the Patent Box?
Here’s what you should be doing now: To benefit from the Patent Box an election must be made so preparations should start now.
You need to:
- Identify qualifying IP that is used in your products, including that spread across group companies
- Review your IP strategy and licensing arrangements to make best use of the regime
- Consider the potential benefits under the Patent Box when negotiating IP licences
- Review intra-company commercial arrangements and reorganisations which may impact on the benefits of Patent Box
Qualifying IP rights
In addition to patents granted by the UK Intellectual Property Office and the European Patent Office, the regime includes patents granted by certain EEA states. These include: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Romania, Slovakia and Sweden.
Development condition
A company, or a group company, looking to benefit from the PB must have created, or significantly contributed to:
- The creation of the patented invention
- Performed a significant amount of activity to develop the patented invention, or any product or process incorporating the patented invention
This work could be carried out before the company acquires the IP right or the exclusive licence for the IP right. Only companies and groups which have been actively involved in the development of the invention can benefit from the regime.
Active ownership condition
Where a subsidiary company of a larger group has carried out the development activity, the parent company must play an active role in managing the IP rights in order to benefit from the PB. The active ownership condition is designed to ensure that passive IP holding companies cannot qualify for the regime.
Relevant IP Income and Profits
Relevant income includes income subject to UK tax from worldwide sales of the patented product; even if patent protection is limited to the UK or one of the other qualifying European countries.
Relevant income includes income from:
- The sale of items incorporating a patented invention
- The sale of spare parts for such items
- Licensing
- Sale of the IP rights
- Compensation received for IP infringement
A detailed calculation will be needed to assess qualifying income and calculate qualifying profits.
Exclusive Licences of Qualifying IP
For licencees to benefit from the PB the licence must be exclusive for a particular field of use.
The exclusivity must pertain to at least one or more countries or territories. The licensee must also either have the unconditional right to bring infringement proceedings or be entitled to the majority of any damages awarded.
