The UK Patent Box – Clawing Some Money Back from the Taxman
As of April 1st, companies paying UK corporation tax can take advantage of a new tax regime, dubbed the “Patent Box,” to reduce their tax burden. Here we explain why this new regime has been put in place and how and why it might benefit your business. Those in US-based and other non-UK businesses shouldn’t stop reading! If you have a UK-based subsidiary, you may still be able to benefit from the scheme.
Why has the regime been introduced?
Although the UK is expected to narrowly avoid a triple-dip recession, its economic woes are still ongoing, which is widely recognised to be due in part to an over-reliance on service industries. The UK government recognises the need for a healthier split between manufacturing and services industries, and the Patent Box is the latest initiative to help in this regard by fostering UK-based innovation and development.
What will the effect be?
The scheme will give companies corporation tax relief on profits generated from UK-based innovation. Specifically, profits earned from patented products developed in the UK will be subject to taxation in FY13/14 at an effective rate of 15.2% rather than the usual 23%. The full benefit will be phased in on a sliding scale such that from FY17/18 onwards the rate will be 10%.
This all sounds simple, but the implications are more far-reaching than you might at first glance realize. A patent covers an invention, which will typically only be an aspect of a product, but the tax relief is applicable to the profits on the whole product. For example, relief might be given for profits on a car even if only the gearbox itself is patented. Furthermore, the tax relief is extended to profits earned worldwide despite the fact that the product might be patented in the UK alone.
The patent can have been granted either directly via filing at the UK Intellectual Property Office, or via the European Patent Office or PCT routes. Non-UK businesses should note that the patent does not have to be first-filed in the UK. Supplementary Protection Certificates and plant variety rights can also be used to claim the tax relief.
As a further bonus, the Patent Box tax relief will apply to profits gained up to six years prior to grant. This means that you will be able to obtain tax relief for pre-grant sales, which will be especially useful for companies operating in fast-moving markets where a technology could be obsolete shortly after or even before a patent is granted. The tax relief could still easily cover the cost of obtaining a UK patent despite the short lifespan. It should also be borne in mind that there are possibilities for accelerating the grant of a UK patent, which will enable tax relief to be obtained more quickly.
As mentioned above, “IP Income” on which the Patent Box tax relief is available includes proceeds of sales of a patented product. However, it also includes license fees received on a patented product or process. It further includes damages for infringement of the patent awarded by a UK court. Other income such as insurance, compensation or damages in respect of non-UK infringement can also count. It is also possible to obtain relief for products that are not covered by a patent if they are made using a patented process, for which a notional royalty will be used to calculate the level of relief.
Should this change how I use and view patents?
Yes! We at Mintz Levin see the Patent Box as a game changer because it introduces new ways in which value can be gained through patents. Traditionally, patents are crafted to make it impossible for competitors to design around, thereby excluding them from an entire marketplace. This monopoly generates revenue for the patent owner directly, and is still a valid and desirable approach.
However, using the Patent Box a patent can have value even if it doesn’t entirely cut out the competition or you don’t wish to use it for this purpose. Provided it covers a product developed in the UK, Patent Box tax relief will apply. As long as the reduced exposure to corporation tax covers the cost of obtaining the patent (typically £750 to £1000 a year amortised over its 20 year life) then it will have paid for itself. This is compounded by the fact that it may well cost less to obtain a narrower patent for this purpose because it will be quicker for your patent attorney to draft. This could mean that in the case of technology for which it might only be possible to obtain a narrow patent, and particularly if the cost of filing and prosecuting an application via the EPO seems not to be justified, it may nonetheless be worth filing in the UK.
In fact, the Patent Box precipitates the need for a change in mindset regarding patents: you will need to have compelling reasons not to obtain a patent rather than the other way around!
As mentioned above, tax relief is available for profits earned on sales of a whole product incorporating a patented invention, and therefore another consideration is how to direct the claims of your patent application. For example, if you have invented a new and improved fuel injector, it may be worth ensuring that as well as having a claim directed to the fuel injector, you also have a claim directed to an engine and a vehicle containing the fuel injector. That way, you could benefit if you are also selling engines or vehicles but equally, if you want to license your patent to engine or vehicle manufacturers an incentive on their part to take a license would be the possibility of obtaining Patent Box relief on the engines or vehicles they manufacture which use your fuel injector.
Who can claim the benefit?
The Patent Box can be taken advantage of by either the owner of the patent or the holder of an exclusive license under the patent, provided of course that it pays UK corporation tax. The patent owner or the licensee must satisfy the “Development Condition” which, broadly speaking, means that the claimant will need to have made a significant contribution to the creation of the patented invention or have performed a significant amount of activity to develop it. We have yet to see how this will be interpreted in practise, but in theory, a non-UK-based owner of a UK subsidiary which pays corporation tax could be an ultimate beneficiary because if the UK subsidiary has designed or developed a patented product, or even just carried out work to adapt a product for the European market, the UK subsidiary should be able to claim the relief.
A word on licenses
In view of the fact that the Patent Box regime does not apply to non-exclusive licenses, licensees should generally negotiate for an exclusive license over a non-exclusive one. If you are the licensing party, you should bear in mind that, under the Patent Box, an exclusive license will be far more valuable to potential licensees, and this should be reflected in the royalty. Patent Box tax relief can also be claimed for non-patent IP relating to an item covered by the licensed patent, and this non-patent IP (such as trademarks and registered designs) need not be exclusively licensed. You should therefore consider applying for a broad spectrum of IP rights that are applicable to your products to maximise the benefit you and your licensees can obtain under the Patent Box.