The UK government has announced that a "patent box" system is set to be phased in from 1 April 2013. Under the patent box, UK companies will pay a substantially reduced rate of corporation tax on profits derived from patents. The rate will eventually reduce to 10%, compared to the normal rates in excess of 20%. The potential savings are therefore significant.
In order to qualify for the patent box, it will be necessary to own at least one UK or European patent or to hold an exclusive licence over such a patent, and to have performed significant development on the patented technology. The reduced tax rate will be applicable to profits derived from both existing and new patents, and will be phased in over a number of years (from 15.2% in 2013 reducing to 10% by 2017).
It should be possible to benefit from the patent box regardless of how the patent is exploited, as the calculation of profits will include income from sales of patented products, sales of products incorporating a patented product, licence fees, royalties for granting rights over qualifying IP rights and income derived from infringement. In addition, worldwide profits from qualifying IP will be eligible for the reduced tax rate.
The tax benefits will also apply to a product on which a patent is pending, for a period of six years up until grant. In such a case the adjusted rate of corporation tax will crystallise in the year of grant, potentially resulting in substantial tax windfalls.
However, it is important to note that this scheme applies only to patent-related income, and not to income deriving from other IP rights such as copyright and trade marks.
The aim of the patent box incentive is to create a competitive corporate tax system in the UK, providing an environment which will encourage companies to obtain and exploit patent rights in the UK. It also hoped that it will provide an extra incentive for companies to retain and commercialise their IP rights, and to invest in developing new products.
The patent box has been welcomed by both large companies and SMEs, as the potential tax savings which could be obtained are considerable. However, in order to obtain full benefit from the patent box it will be important for companies to consider whether their existing patenting strategies are sufficient, or whether greater investment in identifying and pursuing patent protection for new developments is warranted.
We expect further guidance on the implementation of the patent box to be issued by HMRC in the near future. We are presently considering how clients can modify their patenting strategies in order to maximise the benefit of the new system, and we will be addressing this issue with clients in due course.
In the meantime, if you have any queries about this scheme or how it may affect your business, then please contact us and we will be happy to discuss it with you.
1 June 2012