Are you ready to take advantage of the new Patent Box scheme in the UK and pay lower corporation tax?
‘Patent Box’ is the name given to an imminent change to the UK tax regime. The change will ultimately see an effective 10% corporation tax rate being applied to certain types of company profits attributed to qualifying intellectual property rights (IP), primarily patents.
As of 1 April 2013 the Patent Box tax incentive will start to phase in, reaching full implementation by 2017. A 10% corporation tax rate could undoubtedly represent a significant saving for companies which are actively pursuing new and innovative opportunities capable of patent protection.
The focus on patent income as a means of qualifying for a tax relief is the latest idea designed to encourage innovation retention in the UK. So, to ensure that income of the organisation is qualifying, companies or corporate groups may need to re-evaluate their IP portfolios and associated R&D activities.
Reduced corporation tax will be applied as a relief to qualifying companies in relation to the relevant IP income they derive from specified qualifying IP rights. The current ownership of IP will therefore need a degree of review and possibly adjustment to ensure a company’s income derived from that IP qualifies for the tax relief.
Who does the tax relief apply to?
This new tax relief has been implemented as an amendment to the Corporation Tax Act 2010 (via the Finance Act 2012) and so will apply to a qualifying company which pays corporation tax on its profits in the UK. The benefit of the Patent Box regime requires the company to elect into the scheme, so a proactive assessment must be made and steps taken to ensure the relief is applied.
This election alters the method of calculating corporation tax profit for that organisation for each accounting period that it is a qualifying company. A qualifying company can be a company holding the necessary IP itself, even if those rights are then licensed to other parties for development and exploitation of the invention in question. Alternatively, the regime also looks to benefit a company which is an exclusive licensee of qualifying IP rights.
Additionally there are possible tests which mean that a company within a group of companies can elect to receive the tax relief if it has been either developing the IP itself or is actively involved in the management of those qualifying IP rights. The application of this tax relief within a group structure will clearly need some assessment given the different tests which are to be applied to determine which parts of the group will qualify for the tax relief.
What are the qualifying IP rights?
The IP to which this regime applies will be patents granted by the UK’s Intellectual Property Office under the UK’s Patent Act 1977 and also patents granted by the European Patent Office, as well as some specific EEA states with similar patent regimes and registration processes as the UK. In addition some rights similar to patents such as plant variety rights, medicinal and veterinary products and plant protection products fall within the qualifying IP rights.
The qualification requirements include development conditions aimed at ensuring Patent Box is used by companies and groups which have been actively involved in developing the innovation which actually lies behind the IP rights in question or at the very least are actively involved in the management of that IP. Passive IP holding companies will not be able to take advantage of the reduced corporation tax rate.
It is worth noting that world wide income can qualify for Patent Box even if the item is not protected by a patent right in the jurisdiction where the income has arisen, as long as in one territory it is covered by a qualifying patent protection. As a result, a UK company deriving income from product sales in the US (where it holds no patent protection), could include that US income in its Patent Box calculation if the product is then the subject of a UK granted patent.
Changing ownership of group companies may impact on whether Patent Box still applies. Largely this is focused on specific development criteria, requiring that the qualifying company must do further significant development work for at least 12 months. Therefore any acquisition or disposal of shares in a company which holds qualifying patents will require consideration of the new regime. It will be important to ensure that the transaction structure proposed doesn’t prevent the application of the regime once completed.
Reviewing the IP policy or strategy adopted by a company or group in relation to how and where R&D is conducted, as well as consideration of when and where IP is registered, will clearly play a more important role as a result of this potential tax relief.
Any other repercussions of the Patent Box scheme?
It is likely to take some time for Patent Box to affect the overall choice of location for conducting R&D in the way the UK Government would like to see, with product development and creation of IP moving to the UK as opposed to any of the European countries already operating similar tax-based incentives. However, the introduction of this scheme may well start to increase patent applications in time for their consideration as qualifying patents.
Implementation develops from being applied at 60% of the relevant IP profits from April 2013 through a gradual scaling up process until full operation applies the tax relief to 100% of the relevant IP profits with effect from April 2017. As well as the declared goal of encouraging the retention of innovation and R&D within the UK, this type of tax incentive may also see a subtle alteration in the approach to the drafting of patent applications themselves in an effort to secure more qualifying patents as well as perhaps avoid unnecessary revocation claims at a later date.
In addition we are likely to see an impact on how IP documentation is approached in an effort to clarify the nature of what amounts to relevant IP income. As a result, the drafting of patent licenses may see changes in the identification of income streams which are eligible or ineligible for the relevant calculations. At the very least this new legislation highlights the need for careful attention to be taken over the drafting of IP licences when they are to apply after 1 April 2013.