The New ‘Patent Box’ regime

 

On 6 December 2011, the Government published draft clauses for legislation to be included in Finance Bill 2012, and other tax updates. The draft clauses will be open to consultation until 10 February 2012.

 

This included the issue of draft clauses for the new ‘Patent Box’ regime.

 

Following extensive consultation, which included publication of consultation documents in November 2010 and June 2011, legislation for the Patent Box will be introduced in Finance Bill 2012.

 

By way of a reminder, Patent Box is a preferential regime which will allow companies to apply a reduced Corporation Tax rate of 10% to profits arising from patents from 1 April 2013.

 

The reduced rate applies to a proportion of the profits derived from the licensing or sale of the patent rights, or from the sale of the patented invention or products which incorporate the patented invention. Profits derived from routine manufacturing or development functions, and profits derived from exploitation of brand and marketing intangible assets, are intended to be excluded.

 

The Patent Box is an optional regime which companies can elect into. The reduced rate of tax is delivered by providing an additional deduction in the Corporation Tax computation.

 

Patent Box profits for many claims can be calculated using a largely formulaic approach, or companies can instead opt to identify the profit through a more bespoke calculation.

 

It should be noted that only income arising in relation to patents is covered by the new regime. Research and development is not covered – in contrast to similar regimes in other European countries.  Patents granted by the UK Intellectual Property Office and patents granted by the European Patent Office can qualify for the Patent Box regime.

 

Patent holders may wish to license their invention for others to develop. The Patent Box is designed to benefit both the licensor and any licensee who has been given exclusive rights under which it develops and exploits the invention.

 

A company can elect into the Patent Box if it qualifies by holding, or licensing-in exclusively, intellectual property (“IP”) rights of the types specified under the legislation, so long as:

 

it satisfies the “development condition” in relation to those rights, so that the rights count as “qualifying IP rights”; and

 

if it is a member of a group, it satisfies the “active ownership” condition in relation to substantially all of its qualifying IP rights.

 

The key aim of the development condition is to limit the Patent Box to companies and groups which have been properly involved in the innovation lying behind the patent or the application of the patented invention.   The key aim of the active ownership condition is to ensure that the company qualifying for the Patent Box is not a passive IP holding company, but must either have developed the IP itself or be actively managing it.

 

There are also anti-avoidance rules covering the regime. They aim to prevent (i) commercially irrelevant exclusivity being conferred under a licence in order primarily to ensure that income generated by the licensee qualifies for the Patent Box, and (ii) a patented item being incorporated into a product for a main purpose of securing that income arising from sale of the product.

 

The full benefit of the regime will be phased in over the first four financial years following commencement on 1 April 2013. This will be done by applying an appropriate percentage by financial year to the relevant IP profits of the company for each accounting period. So for the 2013 financial year, the appropriate percentage is 60%, for 2014 70%, for 2015 80% and for 2016 90%.