The UK Patent Box
6 August 2012, Jacqueline Holmes
As from the 1 April 2013, companies will be able to take advantage of a scheme, named the Patent Box, which may enable them to reduce the tax rate on income from ‘patented products’ to a minimum of 10% (from the standard rate of 23% in April 2013). As such, the Patent Box could, potentially, save a company a significant amount from their tax bill, and the cost to obtain a patent may be minimal compared to the eventual savings over the life of the patent of up to 20 years from filing.
As with all things, however, the reality is never quite as straight forward as the headlines make it seem.
In order to be eligible to use the Patent Box, a company must satisfy a number of requirements:
The company must own a qualifying intellectual property right
The ownership of the qualifying intellectual property right may be through legal ownership of the right, but alternatively may be achieved through an exclusive licence, provided that it meets the relevant criteria.
In particular, the licence must grant the licensee rights in the intellectual property to the exclusion of all others, including the legal owner of the right, in a whole country. The licensed rights must include the right to bring infringement proceedings or the right to the damages from infringement proceedings.
The qualifying rights include:
- UK patents
- European patents, regardless of where they have been validated
- Patents granted by the national patent offices of a number of European countries, namely, Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden
- Supplementary protection certificates
- Marketing protection rights
- Plant breeder’s rights
Although, the patent, or relevant intellectual property right, must be granted in order to qualify, it will be possible to claim some form of benefit for income relating to the ‘patented product’ for up to six years before grant. The company must, however, have already elected into the Patent Box scheme at the time that the income was generated.
The income must be qualifying intellectual property income, including:
- Income form the sale of ‘patented products’
- Royalties or other income from licences
- Proceeds from the sale of patents
- Infringement and compensation income, e.g. settlement or damages
In relation to ‘patented products’ all that is required is that there is one component of the product that is covered by a qualifying intellectual property right. As such, the patented component may only be a small and relatively inexpensive part of a much larger and more expensive product, but the income from the whole product may be included in the patent box.
It does seem, however, that the component must be reasonably essential to the larger product, to prevent an inconsequential, patented component being added to a complex product just to bring it within the patent box scheme. There are also exceptions for patents that cover packaging, unless the packaging is seen to perform a function essential for the use of the product.
The umbrella of ‘patented products’ does appear to encompass spare parts or replacement parts that are designed to be incorporated into a patented product. This inclusion is aimed at companies that sell patented products as loss-leaders and make the majority of their income from selling spare parts.
The company or ‘group’ must perform development activity
This requirement may be met by the company claiming the tax benefit or by another company within the same group. The definition of a group is relatively wide and, in general, a company is a member of a group, for the purposes of the patent box, if any other company is ‘associated’ with it. The definition has no geographical restriction and so other companies in the group may not be in the UK.
The company must have:
i) created, or significantly contributed to the creation of, the patent invention, or
ii) untaken significant activity to develop the patented invention, product or the way in which the patent invention is used or applied
As such, the development activity may be carried out before or after the patent is granted. Additionally, if a company acquires a patent, or patent rights, the acquiring company must carry out the necessary development activities.
The company must meet the active management condition
i) The company itself must have performed the qualifying development (not another company in the same group), or
ii) The company must perform a significant amount of management activity in relation to the development or exploitation of the rights
As such, if the company claiming the tax benefit was involved in the creation or development of the invention (requirement 3), then this active management condition does not create an additional hurdle. If, however, the development activity was performed by another company in the same group, for example, then the company claiming the tax benefit must meet this additional criterion.
Management activity includes formulating plans and making decisions on issues such as:
- whether to maintain patent protection
- granting licences
- researching other applications
- product features
- market strategy
The Patent Box is being phased in over 5 years, from April 2013, with the minimum 10% tax rate available to companies in 2017. The scheme will apply to all existing UK patents or other qualifying rights, as well as those rights granted after April 2013; however, a company must elect in to the Patent Box in order to take advantage of the lower tax rate that may be available.
In order to take full advantage of the Patent Box there are a number of key points that companies should consider:
- It is only a requirement that a single component of a product is covered by a qualifying right. As such, a company should consider if there are any improvements that could be made to an existing product that would enable them to obtain a patent covering that improvement.
- There is no requirement that any granted patent is required to effectively stop the competition. As such, it may be worth a company applying for a patent with only limited or narrow scope purely to take advantage of the Patent Box.
- It may be beneficial for a UK company to apply for a UK patent even when the majority or all of the sales of a product are made overseas, as the overseas income that is taxable in the UK can benefit from the Patent Box.
- Clauses in licence agreements should be carefully reviewed to ensure that a company can meet the eligibility criteria described above.
- The Patent Box only applies only to companies, not individuals; so individuals and companies should consider whether it is necessary to transfer any patents or other rights held in the name of an individual to a relevant company.
Overall, we recommend that companies review their Intellectual Property Rights in order to maximise their assets and also potentially decrease their tax burden. We would be happy to discuss any questions you may have about the Patent Box, or if you would like any more information about applying for patent protection then please feel free to contact us.
Additionally, further detailed information about the Patent Box legislation can be found here.