patent box

UK PATENT BOX TAX REGIME

AUTHOR: HOWARD VEARES

12 JULY 2013

Copyright © 11 April 2023 BDO LLP. All rights reserved.

PATENT BOX REGIME Key facts

• Enacted in Finance Act 2012• Applies to new and existing patents• Effective for income earned from 1 April 2013• Taxes profits attributable to qualifying IP rights at 10%• 10% tax rate being phased in over five years (60%, 70%, 80%,

90%, 100%)Fiscal Year

Standard

CT rate

PB rate Tax Saving

2013 23% 16.7% 6.3%

2014 21% 14.3% 6.7%

2015 21% 12.5% 8.5%

2016 21% 11.1% 9.9%

2017 21% 10% 11%

PATENT BOX REGIMEConcept

TotalTaxable Profits

Patent Income

Non-Patent Income

Rou

tine R

etu

rn

Patent Box ProfitMarketing Asset

Return

INTRODUCTION TO PATENTSIPO definition (paraphrase s1 Patent Act 1977)

• Invention must – s1(1)PA1977

Be new

Include an inventive step

Be capable of being made or used in some kind of industry

• s1(2)PA 1977 states that things consisting of

- “a scheme, rule or method for performing a mental act, playing a game or doing business, or a program for a computer”

are not inventions for the purposes of the act.

THE BASICS OF THE NEW REGIMEConditions and computation

• Must be a ‘qualifying company’

• Computation of income in the box = three stage process

WHAT IS A QUALIFYING COMPANY?

• A company which holds relevant IP

Qualifying IP rights, or

Exclusive licence in respect of qualifying IP rights

• Qualifying IP right

Patent granted by UK or European Patent Office (plus certain other patent offices)

Must meet the ‘development criteria’

WHAT IS A QUALIFYING COMPANY? Development criteria

• Company creates or significantly contributes to the patented invention, or

• Company performs a significant amount of activity to develop the patented innovation, any product incorporated into the patented invention, or any process incorporating the patented invention


‘significant’

• Determined in the light of all relevant circumstances

Applying for patent in respect of acquired rights

Acquiring rights to and marketing a fully developed patent

Work to test or enhance the viability or usefulness of the idea

Developing a new application for an item

• Contribution could be significant by virtue or costs, time or effort incurred. Alternatively it could be significant due to value or impact of the contribution

not significant

may be significant


Timing

• Company may acquire a fully developed IP

• Company can still benefit from regime if it undertook development activity before or after acquisition

• Example: Company A conducts a project to develop more efficient light bulb. Then discovers another company (B) already holds a patent on light source. Co A acquires the patent from Co B. Co A will meet the development criteria even though it took place before acquiring patent.

WHAT IS A QUALIFYING COMPANY? Active ownership test

• Automatically met where company itself meets development criteria

• Regime allows development to be undertaken by any company in the same group

• Where development is undertaken by another company, patent owing company must meet ‘active ownership test’

• During the accounting period the company performs a significant amount of ‘management activity’ in relation to the right

• Involved in planning and decision making activities associated with developing or exploiting substantially all of its IP portfolio


Management activities

• Maintain protection in a particular territory• Grant licences• Research alternative applications for the innovation or licensing

others to do so

• Deciding on which products will go to market• What features those products will have• How and where they will be sold

All count as management activity


Management activities

‘significant’

• Determined in the light of Resources company employs

Breadth of its responsibilities for the IP

Nature of IP rights held and amount of management they require

The significance and impact of the decisions and plans it makes in relation to the IP

HMRC – normally it will be clear in practice whether the company’s activity is significant.

DETERMINATION OF PATENT BOX PROFITSThree Stages

Stage 1: Identify qualifying income

Stage 2: Extract routine profit element (10% mark up on costs)

Stage 3: Extract ‘brand’ value to determine patent profits

REMAINING PATENT PROFITS SUBJECT TO TAX AT 10%

DETERMINATION OF PATENT BOX PROFITSStage 1

Stage 1a: Identify total gross income of the trade of the company

Includes

- Trade income- Credits brought into account for tax on the realisation of intangible assets and

pre-2002 patent rights

Excludes

- Income streams from financial assets and lending activities


Stage 1b: Identify proportion of ‘Relevant IP Income’ as a percentage of total trade income (from Step 1a)

Relevant IP Income

a) Actual income

1i) Income from the sale of qualifying items (ie, an item protected by a qualifying patent)

1ii) Income from the sale of items incorporating a qualifying patent

1iii) Income from the sale of items wholly or mainly designed to be incorporated into a qualifying item (eg, spare parts)

2. Licence fee or royalty fees for granting rights over qualifying IP or rights granted under an exclusive licence

3. Proceeds from realisation

4. Infringement income


Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income (from Step 1a)

b) Deemed income

‘Notional royalty income’

• Company holds a relevant IP right• Total gross income of the company includes any income derived from things

done by the company that involve the exploitation by the company of that right, and

• That income is not itself relevant IP income or excluded income

Company can compute a notional royalty that is treated as Relevant IP Income


Stage 1c: Split trading profits according to percentage of RIPI/total gross income

Prior to any apportionment

• Add back any R&D expenses • Strip out any loan relationship debits and credit


Stage 2: Remove routine return to determine Qualifying Residual Profit (“QRP”)

• 10% mark up on certain costs

Capital allowances

Costs of premises

Personnel costs

Plant and machinery

Professional services

Utilities and transportation

DETERMINATION OF PATENT BOX PROFITS Stage 3

Stage 3: Remove marketing return to arrive at ‘Relevant IP Profits’

Either • Small claims relief

Take 25% of QRP out as a deemed marketing return

Remaining 75% (up to a maximum of £1 million) is left in the patent box

Or• Compute an arms length royalty rate on the marketing assets –

‘notional marketing royalty’ (Amount A) Trade marks

Signs and indications or geographical origin of goods or services

Information about actual or potential customers

DETERMINATION OF PATENT BOX PROFITS Stage 3

Stage 3: Remove marketing return to arrive at ‘Relevant IP Profits’

• Deduction any actual royalties paid in respect of the assets (Amount B)

If A – B < £nil (ie negative), no further adjustment is required

If A – B < 10% of QRP (stage 2 profits), no further adjustment required

Otherwise MAR = A - B

PATENT BOX REGIMEOther points

Patent pending• May be a number of years between an application for a patent and when the

patent is actually granted (patent pending)• Legislation allows companies to claim an additional relief, in the year the patent

is granted, for any qualifying income and profit for up to six years prior to the grant of the patent

• Relief will be given at the effective rate applicable at the time the patent is granted

Revocation of patent • Patent attorneys tell us that up to 20% of all patents granted in some fields are

ultimately revoked. When revoked, treated as if it never existed.• HMRC have confirmed that where a patent is granted and then later revoked,

there will not be a recapture of relief already given but no further amounts can be claimed

PATENT BOX REGIMEWhat this might mean for your organisation

• Straight forward concept but intricate rules means it can be tricky for FD/Tax managers to be able to easily quantify the potential benefits

• ‘The RealiZer’

Spreadsheet based tool designed to calculate potential benefits using actual data

A base case scenario modelled over a five year period

Capability to model alternative scenarios (steaming of expenses and different MAR)

Report summarising calculations, next steps and recommendations

Example

PATENT BOX – CORE TEAM

Tony [email protected]+44 (0)20 7893 3315

Howard [email protected] +44 (0)20 7893 3224

Nick Drizen [email protected] +44 (0)20 7893 3469

Duncan Nott [email protected] +44 (0)20 7893 3389

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