On 6 December 2011, the UK Government published further details of a lower Corporation Tax rate for IP earnings which will come into force in April 2013.
As part of the Finance Bill 2012, a so-called ‘Patent Box’ will be created allowing companies to benefit from an effective 10% UK Corporation Tax rate on qualifying income relating to use of an invention covered by a qualifying patent or supplementary protection certificate (SPC).
Qualifying patents will include:
• UK patents granted by the UK Intellectual Property Office;
• European patents granted by the European Patent Office.
The tax relief will be available only once the qualifying patent is granted. However, income which arises between the patent application and the date of grant, for up to six years prior to grant, will be recoverable in the accounting period when the patent is granted.
The tax relief will be available to owners and also exclusive licensees of such qualifying patents.
Qualifying income will include:
• Royalties and license fee income from qualifying patents;
• Assignment fees from selling qualifying patents;
• ‘Embedded’ income included in the price of items protected by qualifying patents;
• Damages obtained for infringement of qualifying patents.
Qualifying income will not only include sales of items which are themselves protected by a qualifying patent, but also sales of items incorporating one or more items that are protected. For example, the full income from the sale of a hairdryer will qualify if the hairdryer incorporates a patented motor.
Qualifying income will also include sales of spare parts or consumables which are wholly or mainly designed to be incorporated into patented products. However, in this case the vendor of the spare parts or consumables must also be the owner or exclusive licensee of the qualifying patent.
Income derived from anywhere in the world will qualify, as long as the income is subject to UK Corporation Tax.
The stated purpose of the new legislation is “to provide an additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products”. Therefore, the rules state that the company (or another member of the same group of companies) claiming the tax relief must be actively involved in the patent developing cycle and not merely the passive recipient of income from holding patents. This provision is specifically designed to exclude ‘patent aggregator’ companies that do not themselves commercialise patented products.
Where a single company, or group of companies, has invented, designed and commercialised a patented product then this test will clearly be met. However, where patents are acquired or developed with a third party a company will need to show that they have been active in the development of the patented product.
The new rules will apply to patents first commercialised after 1 April 2013 and in addition to existing patents as long as they are still in force in April 2013.
There will be a phase-in of the tax relief over a five year period starting with 60% of the benefits being available in the tax year 2013/14 increasing up to the full benefit in 2017/18.
What Action Should I Take?
While the ‘Patent Box’ does not commence until 1 April 2013, companies should be reviewing their policies now. In particular:
• Financial Officers of companies should review now whether they wish to benefit from the scheme. The UK ‘Patent Box’ will be optional. Once in the scheme it will be possible to exit. However, it would not then be possible to re-enter the scheme for a period of five years;
• Companies should consider ensuring, wherever possible, that new product developments are covered by at least one qualifying patent;
• To be able to file for qualifying patents, applications must be made before the new product or invention is publicly disclosed;
• Therefore, companies should review their procedures for identifying and recording their inventions to guarantee patent applications are filed in a timely manner;
• Companies should ensure that procedures are in place for identifying qualifying profits on an on-going basis to allow the potential tax relief to be maximised.