In April 2013, the UK Patent Box scheme will come into effect. The scheme aims to encourage innovation by providing a reduced level of tax for UK companies involved in patented technology.
In April 2013 the Corporation Tax rate in the UK will be 23%. In order to encourage companies to retain their R&D activities in the UK, the UK Government have created an effective 10% tax rate on profits derived from ‘qualifying income’.
Who can access the Patent Box?
The UK Patent Box may be available to your company if:
- You will be liable for UK Corporation Tax from 2013-14
- You are involved in the creation or commercialisation of patented technology
The 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 your company will need to show that they have been active in the development of the patented product.
A Profitable Scheme
The amount of your company’s profits that will benefit from the reduced tax rate of 10% will be calculated using a formulaic approach. To start with, you will need to determine what percentage of your income is derived from patented products and processes.
Income derived from anywhere in the world can qualify. In particular, the following examples of income streams are included:
- 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; and
- Damages obtained for infringement of qualifying patents.
Relevant income not only includes 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.
For the taxable income to be placed in the Patent Box it must relate to a ‘Qualifying Patent’. These currently include:
- UK Patents granted by the UK Intellectual Property Office; and
- European Patents granted by the European Patent Office.
The tax relief will be available to owners and also exclusive licensees of such qualifying patents.
What Action Should I Take?
If you believe that your company may be able to benefit from the UK Patent Box then there are a number of steps you should consider:
- You should review your internal procedures to ensure that inventions are identified in a timely manner. Remember, patent applications must be made before a new product or invention is publically disclosed;
- Companies should consider ensuring, wherever possible, that new product developments are covered by at least one qualifying patent;
- 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.
How Can We Help?
- We can assist you and your accountants in reviewing your existing patent portfolio and identifying strategies for maximising product coverage;
- We can help you to identify new innovations and ensure that opportunities for new Qualifying Patents are not missed;
- We are experts at obtaining grant of patent rights before the UK Intellectual Property Office and the European Patent Office;
For further information please contact Neil Thomson or your usual adviser.