Are you ready for the Patent Box?

On 21st March 2012, the Chancellor confirmed his commitment to a UK 'Patent Box' in the budget. As of 1st April this year, it provides for a reduction in tax from 23% to 10% for intellectual property based profits. Readers may have seen the statement from the CEO of pharmaceutical giant GlaxoSmithKline saying, "The introduction of the patent box has transformed the way in which we view the UK as a location for new investments". The Patent Box scheme is not just for the big companies; it might be of significant value to your company too. Over the last year, a number of changes have been made to the Patent Box legislation in the 2012 Finance Bill, some of which are outlined below. The most significant change is that the legislation now includes income from licences for a patented invention in a country that is not covered by the qualifying patent. As a law firm who pointed this discrepancy out to the Treasury, we are delighted to see that it has now been corrected. Hence for example it is now possible for a UK company to include income from licencing an invention in the US, providing it also has a UK or European patent. This is in contrast to the original legislation that appeared to limit licencing to just the qualifying patents themselves.Clearly, this change is excellent news for UK firms whose business receives income on licencing overseas. Other notable points in the final legislation are the confirmation that in addition to patents, the Patent Box extends to Supplementary Protection Certificates, granted secret applications, UK and European plant breeders' rights, and for products also extends to certain marketing protection rights for medicines, and data protection rights. The Government has also extended the patents qualifying for the Patent Box to those from a number of European states, the most notable being Germany. In practice it is unlikely for a UK company to have a German national patent and not a UK or European patent, so the advantages of this provision may be limited. Nevertheless, it still expands the scope of the scheme. Finally, further changes to the legislation include a simplified profit calculation for small businesses and an increase in the threshold on total profits from £1m to £3m. The provisions for SMEs are intended to make the system additionally attractive to small businesses, and the maths seems to back this up as shown in the following example: Assuming a 10 year product life, and even with a rather conservative estimate for the cost of filing, granting and maintaining a patent, if you make more than just £1,000 per month in profit from a patented product or licence, you are likely to be comfortably better off under the Patent Box scheme. These numbers make interesting reading. Moreover, the scheme is generous with what products are eligible: for example, a patent for a printer cartridge will make eligible profits from the sale of a printer incorporating that cartridge, and (perhaps more importantly) a patent for the printer makes eligible profits from the sale of a cartridge for that printer. As a result, the scope for identifying patentable products and subsequent profits is very broad. So, practically what should you do? First, look carefully at your products and identify the technical features that distinguish them over what is known. Most products do have some kind of distinguishing aspect or feature. If you focus a patent application narrowly on these features it is likely that the patent will grant quickly and easily. Perhaps most importantly, getting it to grant will cost you less. It is also worth noting that the UK Patent Office has remarkably low government fees. The overall cost of obtaining a UK patent need not be significant and should not therefore prohibitively eat into the savings. Consequently, in parallel with a strategy of broad patents designed to prevent competitors entering your market, it is also now worth looking at narrow patents that protect specific features. In fact, many companies are looking at their income stream and products and are seeking advice on narrow patents solely for the purpose of exploiting the Patent Box. The corporation tax savings are potentially considerable; particularly so if you make money from overseas sales. It is a simple calculation; does the corporation tax saving outweigh the cost of obtaining a UK patent? For a 10% corporation tax rate I'd say it is worth doing the maths. For more information please contact Anthony Albutt on 020 7269 8550 or email aja@dyoung.co.uk