Significant tax reductions are in store for UK-based companies profiting from patented or similarly-protected innovations from 1 April 2013. ‘The Patent Box’ aims to incentivise development and commercialisation of technology in the UK by taxing profits attributable to patents at 10% rather than the standard corporate tax rate of 22%.
This change is part of wider corporate tax reform including reductions to the main corporate tax rate and R&D tax credits. Patent Box benefits will be phased in over a five year period, starting at 60% with the full benefit available from 2017.
Qualifying IP includes new and existing patents granted by the UK Intellectual Property Office or European Patent Office, plant variety rights, data exclusivity rights and supplementary protection certificates. There are plans to extend the regime to patents granted by other European Union Member States with similar patentability criteria to the UK, this currently includes patents granted by Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden. Pending patents cannot be claimed; however the benefit of the Patent Box can be back-claimed to the priority date once a patent is granted.
Companies that have been granted a marketing authorisation for medicinal products for human or veterinary use that benefit from marketing or data protection are able to use the Patent Box as if they held a qualifying IP right.
Company eligibility criteria
In order to be eligible a company must qualify for UK corporation tax, hold the right to the IP or an exclusive in-license (for at least an entire national territory), be involved in developing the protected item or an item incorporating that protected item, and have active ownership. Active ownership means the company is involved in significant management or development. Development criteria includes both the patented technology itself and ways in which it can be used or applied. If the UK company is part of a group of companies, in some circumstances qualifying development may be undertaken by another member of the group provided the ‘significant management’ criterion is met within the UK. IP holding companies not involved in development are intentionally excluded.
Profit eligibility criteria
Profits from patented products that are not attributable to ‘valuable marketing assets’ or ‘routine activities’ are eligible. This includes worldwide royalties and other licensing income, income from sale of patents, infringement income and income from sales of patented products or products including patented components. There will be two methods for calculating eligible profit depending on the size of the claim; a simpler method will be available to firms with profits less than £3 million. Patent Box losses can also be offset and carried forward.
There are two notable criteria above. First, worldwide profits returning to a UK-based company are eligible. Therefore if a company based in the UK sells product in New Zealand or Australia that income qualifies for the Patent Box tax rate. Second, almost any income from selling products that are protected will qualify for the reduced tax rate, even if only part of the product is protected. As Diarmuid MacDougal, PwC UK R&D and Patent Box network leader notes, “The patent is a switch, so you just need one patent to switch the entire product profit into the [Patent] Box.”
Combined with above the line tax breaks for R&D also being introduced in April 2013, there are incentives to established limited liability companies in the UK. It is anticipated the number of patents filed with the UK Intellectual Property Office will increase. From a company perspective, ensuring that the eligibility criteria are met and documented is an important step. This includes tracing which intellectual property rights are embedded within which products and processes, and documenting patent-related decision making as evidence of the required management activity.
As noted in an article by Tim Jackson (Partner, Baldwins Intellectual Property) in 2009 (http://www.baldwins.com/patent-box-patent-income-to-be-taxed-at-only-10-percent-in-the-uk/), local companies may wish to consider out-licensing or transferring ownership of to a UK company. This could involve forming a new UK-based company tasked with developing the protected products, or transferring ownership to existing joint venture or subsidiary companies in the UK. Of course, we recommend that companies consult with their attorneys and tax advisors before taking any such action, to ensure they are fully aware of any associated risks and that such a strategy is commercially sound having regard to the structure of the business and its commercial goals.
Further information is available from HM Revenue & Customs http://www.hmrc.gov.uk.
If you require further advice, please contact us.