Précis – For businesses operating in the TMT sector, the development and commercial exploitation of intellectual property (“IP”) can be an important part of both establishing and maintaining their ongoing financial success. The introduction from 1 April 2013 of the Patent Box, a new tax regime for IP that reduces the corporation tax rate payable by UK companies on profits from qualifying IP, will therefore be seen as good news for many TMT businesses.
The 1 April 2013 sees the introduction of the Patent Box, a new tax regime for IP that reduces the corporation tax rate payable by UK companies on profits from qualifying IP.
Part of a package of tax changes intended by the UK Government to encourage multinationals to base their operations, in particular tech and innovation activities in the UK, in addition to making the UK a potentially viable alternative to other jurisdictions with advantageous IP tax regimes such as the Netherlands, Luxembourg, Ireland or Switzerland, the Box will also offer significant tax savings for existing UK industrial engineering businesses utilising certain qualifying IP.
What is the Patent Box?
The Patent Box effectively applies a reduced UK corporation tax rate of 10% (the main rate currently being 24%, reducing to 22% by 2014) to profits arising from ”qualifying IP rights” that are “actively owned”. The Patent Box will be introduced from 1 April 2013, with the full benefit being phased in over a five year period.
What IP qualifies for the Box?
Qualifying IP rights are broadly registered patents granted by the UK or European patent office, as well as certain other similar rights such as data exclusivity and plant variety rights. It is also intended that the regime will apply to national patents of other EU member states to the extent such states have similar patent criteria as the UK, although these additional member states have yet to be identified.
Such patents can either be owned directly or by way of an exclusive licence to exploit such patents in a designated national territory. Importantly, for a patent to qualify, the company (or a member of the same group as the company) must have made a significant contribution to the development of the patent or an item that incorporates such a patent. The Box will not apply to income derived from pre-developed patents that are acquired and then merely exploited.
The Box is not intended to apply to income derived from passive investment in IP. Qualifying patents must be actively owned, which broadly means that the company must be performing a significant amount of management activity in respect of the patent (e.g. maintaining protection, granting licences, researching alternative applications).
What income falls in the Box?
The mechanism to calculate income that is subject to the 10% Patent Box rate is complex but broadly, and subject to certain adjustments, worldwide income from the following activities falls within the Box:
- sales of patented items or items incorporating patented items;
- licence fees and royalties from patented items;
- sales of patents;
- any infringement actions;
- deemed royalties for the internal use of a patent in activities that do not directly generate patent income (e.g. the use of a patent in the provision of services).
The Patent Box therefore has wide potential application – it is only necessary for one component of an item to be patented for the income derived from sales of the entire item to fall within the Box.
Preparing for the Box
There are a number of preparatory steps that potentially qualifying companies might take in the run up to the introduction of the regime to maximise their potential tax savings or facilitate the operation of the regime:
- Qualifying patent audit – undertake an audit to ascertain qualifying patents and products that incorporate qualifying patents to assess the potential value of the Box and facilitate future calculations of patent box income.
- Accelerate/expand patent registration – potentially seek registered patents for innovations that have not been patented to date or accelerate existing patent application processes to the extent possible.
- Licence review – review any patent rights held under licence to ascertain whether such licence constitutes an “exclusive licence” for Patent Box purposes and consider, where possible, amending the terms of non-qualifying licences.
- IP holding company review - where potentially qualifying patents have been centralised in an IP holding company, assess whether such company actively owns the patents and whether the requisite development activity is carried on by that company or another group company. Where that company is based outside of the UK, consider whether the Patent Box constitutes a sufficient incentive to move ownership of such rights to the UK.
- Restructure IP holdings – it may be necessary to restructure current IP ownership to benefit from the regime and it may be beneficial to consolidate ownership of qualifying patents into holding companies to facilitate the operation of the regime.
- Document active ownership – to demonstrate active ownership for the purposes of the Box, it will be useful to put in place clear documentary evidence of the management activities undertaken in respect of qualifying patents.
- Cost-sharing arrangements – review current or potential cost-sharing arrangements to ascertain the application of the Box to such arrangements. Subject to certain conditions, it is proposed the Box will apply to cost-sharing and partnership arrangements.
- Timing of entry - consider the appropriate time at which to enter the regime. The Patent Box is an elective regime and it may not be beneficial to elect for entry immediately upon introduction of the regime (for example, if the company has losses).