Q) I run a company that develops and manufactures household products and I am keen to expand by increasing our range of products, To do this, I need to acquire more patents of formulations by purchasing existing patents or by developing new formulations and obtaining patents for them. The former would obviously be an  initial expense, but the latter involves investing significant amounts in research and development.  However, I understand that there are tax advantages of developing patents ourselves that could make the second option more commercially viable. ls this the case? And if so, how much would we save?

You're probably thinking of the "patent box" scheme, which comes into force next April.  Under this scheme, profits attributable to UK and European patents will be taxed at a reduced rate of 10% (rather than the normal rate of 23% which will apply then).

Obviously, if you develop your own formulations and file patent applications to cover the new formulations, then you will be able to take advantage of the reduced rate.  However, the reduced rate only applies to profits arising from granted patents (not to applications), and as it usually takes several years for an application to be granted, you won't derive any benefit for some time, and will have to bear the development costs in the interim.

Buying in existing patents would avoid this problem of time-lag before the applications were granted (and would reduce your R&D costs), but you would need to take further action before you could take advantage of the reduced rate.  If you simply use the patented technology that you bought, you will need to pay tax on the resulting profits at the normal rate of 23%.  In order for you to take advantage of the reduced rate, you would have to develop the technology further; the relevant rules require you to perform "a significant amount of activity" to develop the patented technology or the way it is applied (but, unhelpfully, don't define "significant").  However, the R&D costs are still likely to be less than if you developed your own technology from scratch.

First published in the Financial Times, September 2012