Key features of the Patent Box
The Patent Box is an IP-related tax relief scheme for innovative companies that make a profit from patented inventions and are subject to UK corporation tax. The Patent Box regime aims to encourage innovative companies to locate, commercialise and retain their research and development in the UK.
Under the Patent Box regime, a company that owns a relevant IP right can benefit from a 10% effective rate of corporation tax on qualifying profits related to the qualifying IP rights.
The Patent Box was initially introduced in 2013 and the “old” regime will remain active until 30 June 2021 for companies that elected into the regime by 1 July 2016.
A “new” Patent Box regime came into effect on 1 July 2016 introducing a more complex approach for calculating the IP-related tax relief, referred to as the “modified nexus approach”. Under the “new” scheme, the tax relief depends on the proportion of qualifying R&D expenditure relative to the total R&D expenditure incurred to develop the IP asset. The “new” regime is therefore particularly attractive to companies that carry out substantial R&D activities.
To be eligible for tax relief under the UK Patent Box regime, a company must be liable for UK corporation tax and must satisfy two main criteria:
- Hold Qualifying IP rights; and
- Demonstrate qualifying development or active ownership.
Another key consideration is that the Patent Box tax relief only applies to qualifying income associated with the IP rights.
Qualifying IP rights
By ‘holding’ a qualifying IP right is meant that the company owns the IP right; is a member of a group that owns the IP right; or holds an exclusive license granting the right to develop, exploit and defend the IP right.
As the name suggests, the Patent Box is primarily of interest to patent owners, but besides granted patents, eligible IP rights include the following:
- granted supplementary protection certificates;
- UK or European plant variety rights;
- UK or European plant breeder’s rights; or
- marketing or data exclusivity rights under a medicinal, veterinary or plant protection marketing authorisation.
It is noteworthy that Trademarks, Designs and Copyright are not qualifying IP rights.
To be eligible, the relevant IP rights must have been granted by the UK Intellectual Property Office, European Patent Office or national IP offices of selected countries in the European Economic Area (Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden). There appears to be no need for the territorial scope of the qualifying IP right to have any link to the territory in which the relevant income is generated.
A patent has to be granted before it becomes a qualifying IP right. Nevertheless, Patent Box tax relief can be applied to any profits for up to six years before the date of grant, provided that the patent application had been elected into the Patent Box regime for those accounting periods. Thus, it is recommended to consider electing into the Patent Box as soon as a relevant patent application has been filed, whilst bearing in mind that it is best to delay such an election until the relevant qualifying income has reached an appropriate level.
Qualifying development or active ownership
Simple ownership of an IP right is, by itself, not sufficient to make a company eligible for the Patent Box. The Patent Box regime is aimed at rewarding innovation and R&D expenditure, so a company must have performed a qualifying development in relation to the qualifying IP right; or be actively involved in the ongoing management of the qualifying IP.
Qualifying developments include:
- creating or significantly contributing to the creation of the qualifying IP right; or
- significantly developing the invention covered by the qualifying IP right, or any product or process that incorporates the invention.
A contribution could be significant by virtue of the costs, time and/or effort incurred.
However, if the company’s only activity in relation to the development of the invention protected by the qualifying IP right relates to commercialisation of a product or process that is otherwise fully developed, then this will not satisfy the requirements of contributing to significant development of the invention in question.
An ‘active ownership’ option is provided for group companies. In situations where one member of a group company has met the development condition, another member can be eligible for the Patent Box without meeting the development condition, provided that it demonstrates active ownership of the qualifying IP right.
To meet the active ownership condition, the company must be involved in the planning and decision-making associated with developing or exploiting the qualifying IP. Examples of relevant activities include decisions regarding the prosecution or maintenance of IP rights; the granting of licences; or exploring alternative applications for the invention.
Income associated with the qualifying IP rights
The tax relief under the Patent Box scheme applies to worldwide relevant income relating to qualifying IP rights. Thus, as mentioned above, the income is not linked to the territory covered by the qualifying IP.
There are 5 main categories of relevant IP income, including:
- sale of an item protected by a qualifying IP right;
- income in respect of the use of a qualifying IP right;
- licence of a qualifying IP right;
- sale of a qualifying IP right; and
- damages for patent infringement.
With regard to the sale of items, it is worth noting that products incorporating a protected item, or products that are designed to be incorporated into a protected item may also qualify.
The provisions regarding the use of a qualifying IP right concern, for example, protected methods used to provide a service. In such a scenario, the relevant IP income must be calculated as a notional royalty.
Taking advantage of the Patent Box
The Patent Box regime is optional, which means that to benefit from the tax relief, an active election into the Patent Box regime has to be made. This can be done as part of a tax return self-assessment.
The timing of election into the Patent Box should be considered carefully. A Patent Box benefit is only achieved if the qualifying IP income results in a relevant IP profit. Electing into the Patent Box too early can result in IP losses having to be offset against subsequent IP profits before the Patent Box relief is applied.
Routinely tracking relevant income and R&D expenditure by IP asset can facilitate a Patent Box submission if and when an election is made.
An IP audit is a helpful tool to identify relevant existing or potential new IP assets that may be relied upon for Patent Box purposes. An adjustment of IP filing and prosecution strategies may be appropriate. For example, under the Patent Box it may be beneficial to request accelerated processing of a patent application and even to sacrifice claim breadth so as to achieve the swift grant of a patent.
It is a good idea for companies to review periodically whether and how the Patent Box regime fits into their business. Particular events that should trigger consideration of the Patent Box include the acquisition, licensing and/or disposal of IP rights; entering into collaborations; or any restructuring of the business.
The above provides a brief summary of the Patent Box and should not be relied upon definitively without seeking further advice. For further information or to discuss how your company may benefit from the Patent Box, please get in touch with your usual attorney at Boult Wade Tennant or e-mail email@example.com.