As of April 2013 the UK government is offering a tax incentive to UK companies by reducing the rate of corporation tax payable on profits derived from patented technology to 10%.
The 10% rate is not effective immediately, but the corporation tax rate for such profits will gradually reduce to reach 10 % in 2017.
In general, to qualify for patent box tax savings there are three main requirements (although others may apply):
1. Qualifying IP – the profit must relate to income derived from technology patented before the UK Patent Office (UKIPO) or European Patent Office (EPO) – other IP rights can qualify but these are the main two for UK-based companies.
2. Qualifying person – the person claiming the tax reduction must be a company subject to corporation tax.
3. Development requirement – the company must have created the patented technology or made a substantial contribution to its creation.
We will look at each of these points in more detail.
In general, in order to qualify for the patent tax reduction a UK patent or EP patent must be granted (although grant of a patent from other patent offices such as Germany and Portugal can qualify, as can supplementary protection certificates and plant variety rights)
Other IP rights, notably patents granted in the US where the patentability requirements are quite different to the UK/EU, do not constitute a qualifying IP right.
It should be noted that the tax reduction applies to profit derived from worldwide income relating to the patented technology, not just income in the UK, regardless of whether or not the technology is patented in the relevant overseas territories.
As a rough estimate the cost of obtaining grant of a UK patent can be anything from £2 to £6k spread over several years. Given that this investment can lead to a massive tax reduction on all profits a UK patent can now look like a good investment even if the owner has no interest in obtaining the monopoly right that a patent can provide or enforcing any such right.
As of the date of publication of this article the patent box reduction applies to the sale of any article comprising patented technology where that technology is a necessary integral part of the article.
To provide some idea as to what this might mean, one of the questions raised in Parliament as to the scope of this provision was the theoretical example of a £25,000 car being sold where the only patented technology is a £5 spark plug. Does the patent box tax reduction apply to profits on the full £25,000? The current interpretation is that yes, it does.
However, we wait to see if, owing to massive tax losses in HMRC tax revenue over the next few years, the law is rewritten.
It should also be noted that (subject to the development requirement – see below) an exclusive licensee of the qualifying IP can obtain the patent box tax reduction. Any such license must be national in territorial scope, but can be limited to a particular field of commerce.
The person claiming the tax reduction (i.e. either the owner of the exclusive licensee) must be a company subject to corporation tax.
Individuals cannot benefit from the tax reduction as it applies solely to corporation tax, not to any other tax such as income tax.
Thus, it may be beneficial to incorporate a company in order to obtain a patent box tax reduction rather than to operate as a sole trader.
We would also note that it can be preferable for a patent to be owned by a company in any event (rather than the inventor) as sales of patents are under statute subject to income tax when being sold by an individual, whereas sales of patents by companies can be subject to only capital gains tax, which may be lower.
The benefits of a company owning a patent application instead of it being owned by an individual are compounded by the development requirement
In order to qualify for the patent box tax reduction the person claiming the tax reduction (i.e. either the owner of the exclusive licensee) must have created the patented technology or made a substantial contribution to its creation.
Thus, for example, if an individual files a patent in their name, creates a product, completes its development, takes it to market and then assigns the patent to a company, that company will not be eligible for patent box tax reductions. In contrast had the patent been filed in the name of a company or transferred to the company at an early stage then the company would be eligible for patent box tax reductions.
The patent box tax reduction provides an additional incentive for companies to seek patent protection.
It also provides a strong incentive for innovators and industry to seek patent protection for products and processes for which they traditionally would not have done.
For example, it can now make sense to seek patent protection for products with very short product lifecycles as the tax reduction can apply retrospectively to profits accrued in the four years before grant.
Further, as the tax reduction currently applies to profits derived from articles that incorporate a necessary item of patented technology it may make sense to see if any component parts of larger products might be patentable. We would note, however, the anti-avoidance measure s of the Act:
Income arising from the sale of any item that incorporates a qualifying item is not relevant IP income if the main purpose, or one of the main purposes, of incorporating the qualifying item is to secure that income arising from any such sale is relevant IP income.
We also note that the HMRC has indicated that if after leading to years of tax reductions a patent is subsequently invalidated, they will not seek to recover the tax that should have been paid. (Although the HMRC might of course change its mind!)
We are not accountants and cannot provide professional advice relating to accountancy and the patent box. Thus, if you need advice on this matter we strongly recommend that you contact an accountant specializing in IP. We would be happy to make a referral if you require one.