From April 2013, companies paying corporation tax in the UK may be able to reduce their bill significantly. Profits derived from products and services covered by certain intellectual property rights (most commonly patents) can benefit from a much lower rate of taxation.
Depending on the level of tax saving that is made this way, it may be worthwhile for companies to apply for patents which they otherwise would not have wanted. If the tax saving is greater than the cost of obtaining a patent (which can be as little as a few thousand pounds in the UK), then the patent can be seen as effectively "free".
In this article, we will look at some key aspects of the UK Patent Box, and consider some of the implications for UK companies.
The UK government aims to attract innovative business to the UK. Systems for reducing tax rates for IP-related income have been implemented in a number of other countries, for example France, Spain, Luxembourg and the Netherlands, and the UK is keen to compete.
The Patent Box regime encourages companies to locate or increase innovation-driven jobs and activity in the UK, while also increasing the attractiveness of the UK as a location for companies already deriving profits from their IP.
So, from April 2013 the new Patent Box regime will be active.
Where a company is paying UK corporation tax, they can separate out income made from products and services covered by certain IP.
A series of calculations is done, which outputs a value effectively corresponding to the amount of profit which can be attributed to the IP itself.
A reduced rate of corporation tax is then payable on that amount. The amount is much reduced from the standard rate, as low as 10% from April 2017.
UK PATENT BOX – A MISNOMER
Given the name of the UK Patent Box, it is reasonable to assume that a primary requirement is possession of a UK patent. That is not correct.
In fact, no IP right in the UK is needed at all. Patents issued by the UK Intellectual Property Office do of course count, but so do patents issued by the European Patent Office (whether or not they cover the UK), as well as patents issued in Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia or Sweden.
Further, a patent is not a necessary requirement. Patent Box relief can be obtained where the IP is a Supplementary Protection Certificate (SPC); a plant breeders or plant variety right; marketing authorisation and marketing or data protection; or data protection for a plant protection product. So, do not rule out Patent Box relief simply because you don’t have UK patents. Your portfolio may well include qualifying rights, even if at first glance that seems unlikely.
The list does not include trade marks or registered designs, however, (which are included in some other countries’ regimes, for example Luxembourg).
THE HAVES (LICENSORS) AND THE HAVE-NOTS (LICENSEES)
Patent Box relief is available not only to companies which own IP, but also companies who are exclusive licensees of that IP.
The conditions for what an "exclusive licensee" are, however, not straightforward. To qualify under the Patent Box definition, the exclusive licensee must have:
- rights to develop, exploit and defend rights in the patented invention;
- one or more rights to the exclusion of all other persons, including the licensor;
- exclusivity throughout at least one entire national territory;
- the ability to bring infringement proceedings without the consent of the licensor or the right to most of the damages in such proceedings if they are successful.
Within a group structure, these requirements are relaxed. For example, rights for enforcement do not need to be given where one company within a group holds IP and another exploits that IP.
If you hold licences for technology, it may be worthwhile checking those agreements to find out (1) if they allow use of the Patent Box; and, if they do not, (2) whether they can be (or should be) revised in order to do that.
Not all of a company’s profits can go into the Patent Box – but perhaps it is more than you would think.
(1) Small invention, big product
Selling products which include a patented element is one way of generating Patent Box-eligible income. [Of course, the patent covering the patented element must be in one of the countries discussed above.]
The relevant part of the law is written generously. All of the income from sale of a product including a patented element goes towards the Patent Box calculation – no matter how small the patented element is in comparison to the whole. The only requirement is that the patented element must be physically part of the larger product and intended to be so for its operating life.
So, for example, if a patented semiconductor chip is included in a complex circuit board in a mobile telephone, the income from sale of the telephones goes into the Patent Box.
(2) The Global Marketplace
Just because a company is based in the UK does not mean that its business horizons are focussed here - they, or subsidiary or group companies, may be marketing products around the world.
Again, we find the UK Patent Box law generously written. Income from worldwide sales of products including patented elements is Patent Box eligible. [Again, the patent covering the patented element must be in one of the countries discussed above.]
So, if we have a pharmaceutical product patented in the UK, income from US sales is just as relevant as that in the UK or Europe. That may be particularly important where products have a geographic specificity or advantage (for example, an anti-malarial drug).
(3) It’s not all sell, sell, sell
Selling patented products is all very well, but many companies will have other ways of generating profit from their IP. Fortunately, other streams of income can be put into the Patent Box.
Income from licensing agreements (exclusive or otherwise), sales of patents, successful infringement actions or settlements may be relevant when the calculations for the Patent Box are done.
Furthermore, where the patent covers something which is not sold (for example a process, or a machine used to make an end product), calculations can be done to assign a notional royalty to those activities. That will also be Patent Box eligible.
Therefore, remember to consider all income which is in some way related to relevant IP – there is a good chance it will qualify for Patent Box.
So how can we look at companies’ patent strategies in view of what we know about the UK Patent Box?
A first step is to review what rights currently exist.
- What IP is owned or licensed?
- What does that IP cover?
- How is income derived from what is covered or the IP itself?
Then we can look at what might be done with the existing portfolio of granted rights.
- Do licensing agreements need to be renegotiated?
- Can patented products be included in other, larger, products so that income from those larger products will be Patent Box eligible?
- Should new licensing agreements be considered?
Obviously we can’t ignore pending applications, since Patent Box relief can be claimed retrospectively to a maximum of six years.
- To bring income into the Patent Box, it needs to be derived from a patented technology. So even a very narrow patent can be useful.
- A patent can be used solely for the purpose of Patent Box – there is no need for it to have scope useful for excluding competitors from the marketplace.
- If a broad application is having difficulties, filing a narrow divisional application may be worthwhile.
- Patent Box relief is a lot easier to get, and perhaps broader, when product claims are being considered. So, if a product claim can be pursued (even if it is narrow, or a product-by-process claim) it may still be worthwhile.
FINALLY, FUTURE PATENT FILINGS NEED TO BE CONSIDERED.
- The UK Patent Box can be used with patents from many different countries, not just the UK. So, depending on particular patenting regimes, other countries might be more attractive for patent filing.
- A UK patent can be granted very quickly, within a couple of years, and at a relatively low cost (maybe as low as a few thousand pounds). This is an attractive way into the Patent Box regime for many companies.
- If a small, easily excluded improvement is made to a product or process, that might not previously have been considered worth patenting. However, if the improvement is made in a very strong business area, the Patent Box benefit may be worth the cost of the patent and more.
- The same is true for developments in production processes, which might previously have been kept as trade secrets.
There are a lot of potential misconceptions about the Patent Box regime. Just a few are mentioned in this article.
You do not need to have a UK patent to benefit.
You do not need to have a patent everywhere (or indeed anywhere) that you do business to benefit.
You do not need to own the relevant patents yourself to benefit.
You do not need to sell patented products to benefit.
The Patent Box opens up an important opportunity for savings for UK companies. How to make the most of that opportunity is complex, but the effort may be more than worth it!