At a time when the economy remains top of the political agenda, many have welcomed the UK government’s moves to introduce a preferential tax regime for profits arising from patents. Coming into force on 1 April 2013, the ‘Patent Box’ regime means there will be a reduced corporation tax rate of 10% on such profits. The regime seeks to make the UK a more attractive location to hold and commercialise patented technology and is already generating significant interest amongst both local IP-rich companies as well as businesses looking to move their operations to Northern Ireland (or elsewhere in the UK).
What is the Patent Box?
The reduced corporation tax rate is available to companies exploiting patented inventions or certain other medicinal or botanic innovations. The reduced rate applies to the share of the profits derived from (i) the licensing or sale of the patent rights; (ii) sales of the patented invention or products which incorporate the patented invention; (iii) use of the patented invention in the company’s trade; or (iv) damages paid for someone else’s use of the patented invention.
The Patent Box is an optional regime - a company can elect into the Patent Box if it owns or licences-in patents granted by the UK Intellectual Property Office, the European Patent Office or other specified EEA countries. There are, however, two main conditions:
- the company must have undertaken qualifying development by making a significant contribution to (i) the creation or development of the item protected by the patent; or (ii) a product incorporating this item; and
- if the company licenses-in patent rights, the patent must give it exclusivity for those rights (extending at least country-wide)
If the company is a member of a group, then in some circumstances it can qualify if another group company has undertaken the qualifying development (but only if it actively manages its portfolio of qualifying rights)
Profits benefiting from the Patent Box
The profits benefiting from the Patent Box are calculated as a proportion of the corporation tax profits of the company’s trade – not all of the company’s profits are eligible for the reduced rate. First, a company has to identify how much of their gross income is derived from qualifying patents called their “Relevant IP Income” (RIPI). Broadly there are five types of income that can qualify as relevant IP income: (i) income from the sale of the patented item, or something incorporating it; (ii) licence fees and royalties from rights that the company grants
others out of its own rights over the patented item; (iii) income from the sale or disposal of the patent; (iv) amounts received from others accused of infringing the patent; and (v) a notional arms-length royalty for use of the patent to generate otherwise non-qualifying parts of the company’s total gross income, if they are derived from exploiting the patented item.
The full benefits of the Patent Box will be phased in over a number of years from April 2013, with 60% of the benefit applying to profits generated from 1 April 2013, increasing in 10% increments per annum to full benefit in 1 April 2017.
Developing a successful IP commercialisation strategy
Many businesses find it helpful to have a strategy to commercialise their IP: moving from identifying the IP in their business, to understanding its value and checking to see if there are any fetters on the business’ ability to make money from it. In light of the Patent Box regime coming into force in April 2013, businesses should be reviewing their IP strategy with the Patent Box in mind. They need to be asking where their IP is owned, how it is being commercialised, and whether it falls within the terms outlined by the Patent Box or not. Failure to do so could mean that they really miss out under the new regime.
The most exciting part of the Patent Box is the way in which it provides additional incentives for companies in the UK to retain and commercialise existing patents as well as developing new innovative patented products. The new measures should stimulate the local knowledge economy. They will also encourage foreign companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK: keeping the UK as a world leader in patented technologies.