Patent Box: things to think about

November 2013

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Whilst I promised not to write too much about tax – it’s really not my specialist area – there are one or two things worth thinking about in relation to how you can go about business to take advantage of the new Patent Box regime.

About patents

Even before any tax benefits, patents are valuable assets. The holder has a 20-year monopoly right to prevent third parties from operating within the scope of the patent claims. This is the case even if the third parties have developed their own technology independently of the patentee and were completely unaware of the existence of the patent or of the product or process that the patent protects.

What is Patent Box?

The government wants to encourage more R & D and to provide incentives to keep intellectual property rights in the UK. So over the next 4 years the Patent box regime will provide a phased reduction in corporation tax on profits earned from patents, down to 10% from April 2017.

When does it apply?

· Broadly, your company must either own or be the exclusive licensee of a UK or European patent.

· Your company must have been ‘properly involved’ in the development or application of the patent or related invention. This is known as the ‘development condition’.

· The ownership can be by a different company in the same group from the one which did the development. But the ownership company must then show that it actively manages its IP rights. This is known as the ‘active ownership condition’.

· The relief applies to:

o profits derived from sales of patented products or rights

o licensing royalties from patented rights

o profits derived from using a patented product or tool

o income (eg damages) arising from any infringement

· It’s an optional regime so you need to tell the Revenue that you want to use it.

What do you need to do to take advantage?

· Think about whether there is anything you can patent in the UK or Europe which you might not otherwise have done. It might be worth the effort and cost now.

· Consider incorporating if you haven’t already (which you probably have done to qualify for R & D relief). The regime is only open to companies.

· Where you are a licensee of relevant IPR, think about making these licences exclusive.

· Think about how you can structure your business, your corporate group structure and your business contracts so the revenue streams come in a way which takes maximum advantage of the Patent Box regime, and can be clearly tracked.

· If you hold a range of IPR that you use in a number of products, you should establish the necessary systems to help trace which qualifying intellectual property rights and which marketing assets are used in which products so that the relevant intellectual property income figures are accurate. The rules are detailed. Obviously this is going to increase paperwork and cost.

· Document your decision making more than you might currently do to show you are carrying out the significant amount of ‘management activity’ required in order to meet the ‘active ownership condition’.

· Think about the implications of the ‘development condition’ if you are thinking of buying or selling shares or relevant assets. The decision to do a share deal or an assets deal could be influenced by the importance of qualifying for the relief. There are related rules here; for example if you are buying shares, the target company needs to meet the ‘development condition’ for 12 more months before being eligible. If your company is buying a patented invention directly, then it needs to do more development of the invention itself to use the relief.

· And if you are buying shares or assets, your due diligence should include checking how any relevant IPR is held (if licenced, is this licence exclusive?) and how it has been developed and managed.

· Beyond this basic advice, the rules are all too detailed and complicated for me, so you need to get a specialist patent/tax advisor to help you decide what to do. I can introduce you to one if you want, and can work with them to implement things.