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Patent Box Legislation and what it could mean to your company’s corporation tax payments.

Kristina Whitfield

Jan 8, 2013

Operational E 2

Author: Kristina Whitfield Undertakes marketing activities for Pivotal Scientific and their clients.

Kristina Whitfield

What is it?  This is a preferential tax regime which will allow companies to apply a 10% corporation tax rate to profits which can be attributed to patents and other IP instead of the mainstream rate of 23%.

It is part of the government’s initiative promoting the UK as ‘The Place to be’ for innovative businesses by providing an additional incentive for companies in the UK to retain and commercialise existing patents and develop new innovative patented products.

When does this start?  These savings apply from the new 2013 tax year with the benefits being phased in over a 4 year period, although 60% of the benefits will be available from 1st April 2013, increasing 10% per year till 2017.

Does this just apply to products covered by patents?  No, companies can benefit regardless of how they use their patents.  They can be licensed, included in patented products, used in internal processes or for the provision of services. Patent Box income can include licence and royalty fees, income from sales of patented products, and products that include the patented invention and income from the sale of spare parts. Also, where non-patented goods or services are provided using a patented process, it will be possible to apply the Patent Box to a notional royalty relating to the patented process.  The definition of qualifying income under the Patent Box is generous in that it allows the incorporation of a patented product into a parent product.  It has been likened to the inclusion of a patented speedometer in a car qualifying the whole car for the tax relief.

Is this limited to patent profits generated solely in the UK or Europe?  No, the 10% rate will apply to worldwide profits arising from existing and new patents – not just from UK profits. 

What are the qualifying conditions?  There are two principal qualifying conditions:

  • The company must make a significant contribution to the development or creation of the patented product or the product which incorporates the patented item. In a group situation, or where the company out-licences the patent, the company holding the patent must actively manage its portfolio of qualifying rights, and another group company can undertake the qualifying development.  Companies that are passive holders of IP will not qualify under these rules.
  • If the company in- licences its patent rights it must have exclusivity which is at least country-wide.

While the 10% rate will only be available once a patent is granted, any profits made while the patent is pending, (for a period of up to 6 years from application to grant), can also be included in the Patent Box in the accounting period in which the patent is granted.  This may lead to a windfall repayment of corporation tax in the year of grant.

How can PSL help your company?

  • By reviewing the patenting policy of your business.  PSL can look at the patentability of new inventions, products or processes and assist in the patent application process before disclosure of the invention.
  • By reviewing IP licences to ensure the exclusivity requirements are met and negotiating IP licences with 3rd parties for in- or out-licencing.
  • By ensuring systems are in place to trace where patents are used in products or services, to enable your accountants to calculate profitability.

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