The UK Government’s Patent Box scheme

Organisations paying corporation tax in the UK will, from April 2013, be able to apply for tax relief on worldwide profits made from patented products or products with patented components.

A UK patent or any patent granted via the European Patent Office could reduce tax on profits from 23% to potentially 10%. With this headline figure, a company that has relevant IP profits of £500,000 could save £65,000 in corporation tax under the Patent Box regime.

Who qualifies?

Generally, companies that are both

  • liable to pay UK corporation tax, and
  • owners or exclusive licensees of qualifying patents

What qualifies?

  • Worldwide profits on products that have qualifying patent protection over the entire product
  • Or, worldwide profits on products that have one or more components with qualifying patent protection
  • Licence fees and royalty income on the above products
  • Outright sales of patents rights on the above products
  • Income from infringement and compensation proceedings on the above products

What should I do?

  • Identify products that already have patent protection

Tax relief should be sought on profits derived from all products with patent protection already in place.

  • Assess how to make unprotected profitable products patentable

Businesses should consider which of their products are the most profitable and, therefore, the most important in this instance. Because patentable ideas must be new, products that are already on the market cannot be patented as they are, nor can any of their components. Instead, companies should consider whether any incremental changes might be suitable for patent protection, creating the possibility of tax relief and maximising profits.

  • Evaluate the cost benefit of seeking patent protection

With the new Patent Box regime, the cost of seeking patent protection will often be less than the savings made through tax relief. Organisations should calculate how much will be saved and compare this to the cost of patent protection. Fortunately, the UK is a comparatively inexpensive jurisdiction in which to seek protection and in many cases relief gained will be greater than the overall cost for obtaining a qualifying UK patent.

  • Get protecting

Companies should consider patenting all new products and changes to existing products, even if they would not normally seek protection, given that this will result in the new products benefitting from tax relief. Only a narrow scope of protection that covers the product or a part of the product is necessary to benefit from the tax relief and this can help to achieve grant quickly and relatively cheaply.

  • Watch this space

As with all new legislation, the final manner in which the Patent Box is applied will only become certain with time. Nonetheless, organisations seeking to take advantage of the tax relief should be taking action now, and ensuring they monitor for developments, particularly once the system has been introduced.