Open the box and take the money!

Perhaps you remember the 1960’s game show “Take your pick” where host Michael Miles offered the contestants the option to open the box or take the money? Well, the 2013 equivalent will be the Patent Box, where potentially a substantial amount of profits from patented items can benefit from a 10% Corporation Tax rate. An exciting option available to companies who have intellectual property (IP) on their books.

The creation of high-tech and scientific IP often involves intensive research activity, with businesses incurring substantial up-front costs with an uncertain future reward. Turning an initial patent or concept into a marketable product requires a range of complementary activities, including further research and development (R&D) either on the IP itself or the processes required to manufacture or deliver the product or service.

Successful exploitation in the global market requires significant further high value activity. Until April 2013, when the Patent Box legislation starts to apply, there are no specific incentives for companies to retain IP in the UK during commercialisation. In contrast, several other jurisdictions provide incentives for companies to own and exploit IP, particularly patents, in addition to R&D incentives.

As a result, the UK tax regime may have been seen as uncompetitive for companies to hold and exploit patents, with incentives for businesses to transfer patents offshore prior to the full realisation of their value, in order to benefit from more advantageous tax regimes elsewhere. Rather than tightening exit rules, which could inhibit commercial transactions and risk making UK businesses uncompetitive on the global stage, the Patent Box legislation is being brought in to encourage businesses to retain and exploit IP in the UK through the introduction of the Patent Box.

The Patent Box enables income from a wide variety of sources to be included as “Relevant IP income” to be taken into account for the purposes of the special Corporation Tax Rate. Items which can be included incorporate a patent and can be:

– the proceeds or royalties from the sale or licensing of the patent or the patented invention,
– proceeds from the sale of goods e.g. spare parts which incorporate the patented item or which are designed to be incorporated into the patented item, or
– damages and settlement funds from patent infringement actions.

The reduced rate of Corporation Tax (CT) from April 2013 only applies to companies who hold the qualifying IP rights or hold the exclusive licence in respect of qualifying IP rights. Tax relief will be phased in from 2013 where CT at the special 10% rate will be charged on 60% of the profits attributable to the patented or licenced item, increasing by 10% per tax year until April 2017 when the 10% rate will be charged on 100% of the profits attributed to these items.

We would like to talk to you about this new special rate if your company holds IP rights from actively developing a patent or a product incorporating a patent, or if you have not developed the technology but hold the exclusive licence. You may need to consider formalising currently informal arrangements over licences and start to put in place systems to collect information necessary to ensure the calculation can be made. In order to maximise the benefit, we will need to make an election even if there are only patents pending and not yet granted, and we can go back to claim Patent Box to the date on which the patent was filed or for 6 years from the date of the grant whichever is the later.

We will also be happy to discuss with you whether any not-so-exclusive arrangements or licences could be made exclusive to enable your company to benefit.

You can contact us on 0845 177 5007, by email at [email protected], or by using the contact form on the website.