Could you benefit from the patent box?Print publication
Businesses do not always apply to patent their inventions. They may consider the cost to be prohibitive and trust to their ability to keep the invention secret. Alternatively, they may consider technological developments in their sector to be so fast-moving that there is no point in patenting. Or reliance may be placed on other intellectual property rights, such as copyright (common in the software industry). Many businesses may not even appreciate that they have created a patent or process that is potentially patentable. As a result, the UK “underpatents”. The advent of the patent box – which came into effect last April but has so far had a low profile – should prompt a re-think. Even if the commercial benefits of patenting may be marginal, the tax break should incentivise businesses to start patenting. It is important to emphasise that the invention need not be world-changing, a new generation of smartphone for instance, or a pharmaceutical wonder drug. A new brew basket for an espresso machine, for instance, might be eligible, or the process for creating a new type of drink.
The reduced rate
The patent box enables companies with qualifying patents to tax the profits arising from those patents at an elective reduced corporation tax rate of 10 per cent. The regime is being phased in so that the full reduction will not be available until 2017. Until then companies seeking the reduction must apply an appropriate percentage to the profits earned from its patented inventions at a transitional rate. For the period 1 April 2014 to 31 March 2015, the rate is 70 per cent; it will 80 per cent from 1 April 2015 to 31 March 2016.
Are you eligible?
To be eligible the company must own or exclusively license-in patents granted by:
- the UK Intellectual Property Office
- the European Patent Office
- the following countries in the European Economic Area: Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, Sweden.
The company or another company in the group must also have undertaken qualifying development for the patent by making a significant contribution to either:
- the creation or development of the patented invention
- a product incorporating the patented invention
In addition to patents, the patent box may be available in respect of certain other medicinal or botanic innovation rights.
Group companies may be eligible for the patent box, provided they “actively own” the patented invention by taking a significant role in managing its whole portfolio of eligible patents – passive intellectual holding property companies will therefore not qualify for the regime. So, where a fellow group company has developed the intellectual property, the patent box company must be actively managing that IP.
Where the IP is licensed-in rather than owned the requirement is for an exclusive licence over at least an entire national territory – a part only of a country would be insufficient to entitle qualification. In addition, the licensee must either be able to bring infringement proceedings to defend its rights or be entitled to most of the damages awarded in successful proceedings relating to its rights.
The income must derive from one of the following sources:
- sales of the patented product(s) incorporating the patented invention or bespoke spare parts
- licensing of patent rights
- selling patented rights
- infringement income
- damages, insurance or other compensation related to patented rights.
This is very broad and means that anyone with a patent should be able to benefit from the patent box, if the is invention is any way attractive to third parties.
Making the election
In order to benefit from the reduced rate available for the patent box, it is necessary to make a formal election to HMRC, either in your tax computations or separately in writing. The election must be made within two years of the end of the accounting period in which the relevant income arose.
Criticisms of the patent box
The patent box has been the subject of some criticism since its introduction. Whilst the Government has stated that the objective of the patent box is to help stimulate innovation, critics, including the Chair of the parliamentary Public Accounts Committee, have criticised it as tax avoidance. The German finance minister has said he thinks it represents unfair tax competition, Germany not having anything similar. The EU Code of Conduct Group has suggested that it considers that the patent box contravenes the code of conduct for business taxation.
This criticism, even if it were merited, is unlikely to warrant a change in course. The Government has rejected the criticism and pointed out that the qualification criteria are stringent – this article has done no more than summarise what is in fact complex legislation. It would be a big surprise if the patent box were not here to stay. Accordingly, it is worth considering whether you might be eligible for what is a significant tax reduction.
Please contact us if you would like to know more about how your company might benefit from the patent box.