On 1 April 2013 the eagerly anticipated Patent Box system came into force. This is an important tax break for companies that derive income from products or services protected by patents, and which those companies have been involved in developing.
Currently, 80% of such income will be subject to a reduced Corporation Tax rate of 10%, and from the tax year 2017/18 that rate will apply to 100% of such income.
The details of the scheme are quite complicated, but we set out below some salient points:
1. To qualify for the Patent Box regime, patents must belong to a company that has been actively involved in developing the invention. Thus, patents standing in the name of an inventor or of a holding company would not qualify and would need to be assigned to the company that is deriving the income from the invention.
2. To benefit from the reduced tax rate, a company must opt into the scheme within two years of the end of the accounting period in which the income arises. The company can opt out at any time, but cannot then opt back in for five years.
3. A patent qualifying for the Patent Box regime includes not just British and European patents, but those granted by the national patent offices of Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden.
4. Income qualifying for the reduced Corporation Tax rate includes not only income derived from the sale of patented goods but that derived from the grant of an exclusive licence (provided this covers the whole of the United Kingdom), from the sale of patents and income arising from the infringement of patent rights. A notional arms length royalty on income arising from using a patented product in a process or in the provision of a service may also qualify.
5. If a product includes a patented component, however small, that is integral to the product, the whole of the income deriving from sales of that product can qualify for the Patent Box.
6. HMRC will not be in a position to judge whether a patent subject to the Patent Box scheme is valid, or whether the claims of the patent actually cover the product being sold or the process used, but we may assume that false representation in relation to patent rights relied on will, if discovered, be treated in the same way as any other tax fraud. If however a patent is revoked and thus deemed never to have been valid, HMRC will not claw back tax that has been saved in the meantime.
7. The advisability or otherwise of a company electing the Patent Box scheme in respect of its intellectual property rights will be a matter for discussion with the company’s accountants. In general however, there will be an incentive to apply for patent protection of as many of a company’s products or processes as possible since even a very narrow patent claim, that might be of little use in impeding the activities of competitors, can still reduce a company’s tax burden provided it covers the company’s own income-generating products. It may also increase the incentive to defend patents against revocation proceedings in order to keep a patent in force for as long as possible.
8. Further information can be obtained from the UK Intellectual Property Office website, www.ipo.gov.uk/types/patent/p-patentbox.htm. The HMRC website, www.gov.uk/guidance/corporation-tax-the-patent-box gives some detailed information about the Patent Box regime, including examples of how a tax rate might be worked out.