The 10% tax rate for companies
The Patent Box tax regime to be introduced in April 2013 will establish a 10% corporation tax rate for eligible profits derived from patented technology (and certain other intellectual property (“IP”)).
This is a key Government initiative designed to increase the tax competitiveness of the UK for innovative high-tech companies, and will be run in conjunction with the existing Research & Development tax relief scheme.
The Patent Box will be phased in over a number of years, with 60% of eligible profits initially qualifying for the reduced rate of taxation. This will increase by 10% each year until April 2017 where 100% of eligible profits will be taxed at the 10% rate. Significant tax savings will therefore be possible, given the lowest UK corporation tax rate is currently 20%.
There are a number of conditions that will need to be met for companies to qualify, namely:
- Qualifying Patent Condition – The patent must be granted by the UK Intellectual Property Office, the European Patent Office or certain other national patent offices within the EEA.
In addition to patents, supplementary protection certificates, secret patents (information in relation to national security or the safety of the public), marketing authorisations in respect of veterinary, medicinal products and rights relating to plants can also qualify;
- Ownership Condition – This requires a company to either hold the qualifying IP rights itself or an exclusive licence over these rights.
- Development Condition – This requires a company (or the group that the company is part of) to have made a significant contribution to the creation of the patented invention or to the application of that patented invention.
- Active Management Condition – Where a company in a group holds the patent, which it did not itself develop, that company must actively manage its portfolio of qualifying patents. This could, therefore, enable a group to qualify where it uses a holding company to legally own and protect the IP rights.
A wide range of worldwide profits could qualify, including:
- Income from the sale of patented products and integral spare parts.
- Patent royalties and other income from licensing.
- Income from the sale of the patent or the granting of an exclusive licence.
- Infringement income, damages, proceeds of insurance or other compensation.
- Using a patented process to produce non patented items.
- Using patented items to provide a service.
A significant benefit of the UK regime (compared with similar schemes introduced by other countries) is that it is only necessary for there to be one patent within a product to enable the whole product to qualify. For example, a patent on the exhaust of a car could enable profits from the sale of the car (minus a routine profit and deemed marketing royalty) to qualify.
Practical examples of how the regime will apply to certain income
The regime is wide ranging, as the examples below illustrate:
Scenario 1 – A non patented printer is sold with a patented printer cartridge as part of a single package
The whole package could qualify for the 10% tax rate under the patent box regime. This is because the patented printer cartridge is intended to be incorporated in the printer for its whole useful life.
Scenario 2 – A printer is patented but the cartridge isn’t, and cartridges are sold individually
Sales of the cartridges on their own could also qualify as they are designed to be incorporated into a patented printer.
The questions that companies should consider as soon as possible are:
1. Does your company hold any patents? If so, have they been granted by a qualifying patent office?
2. Do your existing patents require updating?
3. Does your company hold any IP that could be patented?
4. If the company holds a licence, does this licence agreement enable the company to qualify (i.e. an exclusive licence)? If not, could such a licence be obtained or an existing licence agreement be altered?
5. Has, or will, sufficient contribution be made to satisfy the development condition? If not, could the company’s proposed involvement change to enable the development condition to be satisfied?
6. Does the IP holding group company have sufficient active management of the patents? If not, could this change so that the qualifying condition could be satisfied?
It is almost certain that there will be companies that will fail to qualify under the Patent Box tax regime, where careful planning (often at an early stage) would have resulted in them satisfying all of the qualifying conditions and therefore benefiting from the 10% tax rate.
Appropriate planning is therefore essential as the tax savings could be substantial. These savings could be derived from the date that the patent application is filed, not just from the time that the patent is granted. It is therefore important to act before April 2013 to ensure that maximum financial benefits are obtained.
Also relevant for innovative companies – Research & development tax relief