What is the patent box?

What is the Patent Box? In the 21 March 2012 budget, the Chancellor confirmed a commitment to a UK 'Patent Box' with the aim of encouraging innovation. The next day the pharmaceutical giant GlaxoSmithKline announced a £500m investment in the UK, with its CEO saying: "The introduction of the Patent Box has transformed the way in which we view the UK as a location for new investments." So what is this Patent Box, and why should it be so important? A Reduced Tax Rate The Patent Box is an opt-in scheme for obtaining a reduced rate of UK corporation tax on certain IP-based profits. The scheme starts in April 2013 and over several years will phase in a reduced rate of corporation tax of just 10%, compared to the normal rate of 23%. Relevant IP income can be from a number of different sources, including: • worldwide sales of a patented item or a product incorporating the patented item; • worldwide fees and royalties from licences granted to third parties to make, sell or use the patented item, or to use a patented process; • damages awarded for infringement of patent rights. It is important to note that just a UK or European patent will therefore make the income from worldwide sales eligible for the scheme, even if you do not hold a patent in the country of sale. Similarly worldwide income from licences is also eligible, but in this case of course you may need a patent in a particular country in order to licence it there. There are also a number of other sources of eligible income, including some related to using a patented invention in a way that still generates company profits, but not directly though sales or licencing. The calculation of the patent-based profit on these incomes then uses a refreshingly straightforward three-step process to arrive at the profit eligible for the reduced tax rate. Who Can Benefit? The Government's aim is to 'create a competitive tax environment for companies to develop and exploit patents in the UK and maintain the UK's position as a world leader in patented technologies'. A company can qualify for the Patent Box if it owns or takes an exclusive licence for a UK or European patent, provided that the company actually made a significant contribution to the creation or development of the invention claimed in the patent, or to a product incorporating this invention. So what is a 'significant contribution'? For the development of a product incorporating an invention, it may well be the development of the technical knowhow that gets a prototype to commercial viability – but the simplest way to 'significantly contribute' is to be the applicant for the patent in the first place. Patent Box Patents The Patent Box statute rules out the frivolous use of patents to access the reduced tax rate. For example, incorporating a patented microchip into a loudspeaker for no functionally valid purpose in order to claim profits from the speaker sales would be exempt. However, by contrast if one were to validly obtain a patent for a feature of the loudspeaker itself, then those sales would become eligible. Moreover, sales of a stereo system incorporating that loudspeaker would be eligible too. At this point it is important to realise that an invention does not need to be earth shattering to have technical merit or to be of commercial value, either in terms of being able to charge a premium, or gaining (or retaining) market share, or simply making a product slightly lighter, faster or cheaper. Consequently most products or processes have a patentable aspect to them if one focusses on the specifics. Such specific patents are often narrow in scope and not necessarily suitable for licensing or for foxing the competition, but have the advantages that they tend to get granted more quickly by the patent authorities, they provide some protection for a characteristic feature of your actual product, and, now, that they make income from your product eligible for the Patent Box tax rate of 10%. Summary The Patent Box scheme presents a possible significant financial benefit to companies of all sizes. Companies are well advised to review their R&D and products to determine if one or more patents could allow them to benefit from the substantial tax reduction on offer. More information is available at D Young & Co's Knowledgebank at www.dyoung.com. Alternatively, please contact Doug Ealey at dre@dyoung.com or Anthony Albutt at aja@dyoung.com.