From 1 April 2013, there will be a preferential tax regime for profits arising from qualifying patents and some other forms of intellectual property (but not registered designs or trade marks) known as the "Patent Box". The full Patent Box relief will not be available immediately upon commencement, but shall be phased in over four financial years’ period with full relief being available starting from 1 April 2017. The Patent Box is optional, so a company must elect to participate in it either in the computations accompanying its company tax return, or separately in writing.
The Patent Box will apply a reduced 10 per cent rate of corporation tax on worldwide income attributable to patents and other similar intellectual property (IP), comparing favourably with the standard rates of corporation tax. The purpose of the new regime is to provide a competitive corporate tax system and to support strong and sustainable private sector growth, by providing an additional incentive for UK companies to retain and commercialise their existing patents, to develop new innovations and to encourage them to "locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK's position as a world leader in patented technologies". As part of this, the UK Government is also reviewing its R&D tax credits for innovation scheme.
The legislation to implement the Patent Box is included in the Part 8A of the Corporation Tax Act 2010 (UK), as introduced by the Finance Act 2012 (UK) (profits arising from the exploitation of patents etc). The forthcoming draft "Profits from Patents (EEA Rights) Order 2013" will extend the regime for patents registered in other EEA countries. The new Patent Box guidance ’HMRC Corporate Intangibles Research and Development Manual’ was published in November2012.
Main aspects of the proposed Patent Box
Particular aspects of the proposed Patent Box regime include:
- "qualifying IP", which will include UK and European patents, as well as supplementary patent certificates (SPCs), data exclusivity regulatory rights, orphan drug rights and plant variety rights. It will also cover national patents granted by other Member States operating comparable patentability criteria and search and examination practices to the UK; and
- "qualifying income"’, which will include patent royalties and other income from licensing, income from the sale of products incorporating a patented invention (or spares or parts that are intended to form an integral part of the product), income from the sale of patents, infringement or compensation income and notional royalty income for the use of existing as well as new qualifying IP in processes or services (phased in over four financial years from 1 April 2013).
A company will qualify if it:
- owns or holds an exclusive licence for the qualifying IP, where exclusivity is conferred throughout at least an entire national territory; and
- meets an "active ownership" condition (passive IP holding companies do not qualify), requiring companies to be actively involved by making a significant contribution towards the creation or development of the invention claimed by the patent (or a product or process incorporating it) and its management.
It is proposed that groups will be able to qualify where IP is held centrally but is actively owned and managed in the UK by the Patent Box company. In relation to calculation of Patent Box benefits, a largely formulaic approach has been proposed (which is outside the scope of this article). A targeted anti-avoidance rule has also been recommended in order to target companies seeking to obtain an artificial tax advantage by falsely inflating their Patent Box tax deduction. Provided that a transaction is "commercially appropriate", it does not appear to be abusive to obtain a patent for creating Patent Box benefits.
Preparing for the new regime
This new regime will soon make patents valuable from a tax perspective. A company considering electing into the regime should start preparing itself now to meet its requirements if it wishes to opt in to the Patent Box regime by undertaking actions including:
- ensuring (as far as commercially possible) that its patent licences are exclusive within the meaning of the regime, as only such licences (including intra-group licences) qualify (bearing in mind the anti-avoidance rule that prevents commercially irrelevant exclusivity being conferred primarily to ensure that income from the licence qualifies for the Patent Box);
- reviewing existing arrangements before granting exclusive licences as part of patent litigation settlements (otherwise, it may inadvertently convert an existing exclusive licence into a non-exclusive licence that no longer qualifies for the regime);
- if member of a group, considering transferring its qualifying IP to an IP holding company for it to grant licences to other group members who carry out the other aspects of the group's business;
- reviewing its transfer pricing policies so that any future transactions with Patent Box companies withstand scrutiny;
- considering whether to increase the number of products for which it seeks patents, weighing the cost of applications, the loss of secrecy and the limited life of a patent against the tax benefits (it may wish to narrow the scope of its patent applications to accelerate the application process so that it can benefit from the new regime sooner);
- in the event that it currently holds its patents outside the UK, revising its ownership policy;
- if holding a range of IP that it uses in a number of products, ensuring that it is fully aware of which of those rights are qualifying IP, and that it can trace which of those rights are used in which products so that its relevant IP income figures are accurate;
- ensuring that accounting records are in place to accurately calculate the profits subject to the Patent Box (and Patent Box losses which can be carried forward and set off against future Patent Box profits) and carefully monitoring income connected with current patent applications (as these profits may fall within the regime if derived after 1 April 2013); and
- finally, if it is not already doing so, documenting its patent-related decision making as evidence of its active "management" activity.
This is good news for high technology businesses and of particular interest to the life sciences sector, who has welcomed the new regime as being likely to foster a change of attitude in relation to the UK as a focus for research and development, and manufacture of pharmaceutical products. However, companies must understand that, if they opt in to the new regime, it may take a while until the possible benefits are realised.