The Patent BoxWhat’s in it for meRichard Stanley – Tax Partner

“...The Patent Box is a key initiative to make the UK tax regime competitive for innovative high-tech companies…”

“… in recent years, too many companies have been choosing to move their patents offshore…”

“…The Patent Box will help to re-establish the UK as a top location of choice for innovative industries…”

“…will encourage businesses across a wide range of sectors to invest in the UK, generating growth and creating jobs.”

David Gauke – Exchequer Secretary to the Treasury

Many types of Intellectual Property

GoodwillGoodwill

Goodwill

Network

CorporateCulture

EmployeeKnow-how

CustomerContracts

SupplierRelationships

Legal Intellectual Propertye.g. Patents, Trademarks,

Copyrights

Know-howe.g. Undivulged

Technical Information

BrandImage

Confidential Concepts

InternalSoftware

Human Capital

WorkPaper

s

Overview of the Patent BoxGovernment is striving to create the most competitive tax system in the G20

Corporation tax will be dropping to 23% by the end of this Parliament

Aim of the Patent Box is to provide an incentive for companies in the UK to retain and profit from existing patents and encourage the development of new patent products.

Overview of the Patent BoxGovernment focusing on patents because it is believed they have a strong link to high-tech R & D and manufacturing activity

Does not cover copyright or trademarks

It will seek to tax qualifying income and profits arising from patents at a rate of 10%

Regime will apply from 1 April 2013

Why Patents?The majority of businesses hold some IP, and the government continues to believe that lower tax rates for all will usually be the fairest and most cost effective way to foster economic growth

A general relief for IP would be expensive

Patents have a strong link to scientific and high-tech R & D and to technological innovation activity

Patents are readily identifiable, legally protected and subject to examination by an independent body before being granted

What are Patents?

Monopoly right that lasts up to 20 years from the filing date of the patent

Protects innovations that are new, not obvious and are industrially applicable

Some exclusions – business methods, scientific theories and mathematical methods

What are Patents?

Application made to the UK Intellectual Property Office (UKIPO)

Description, claims, figures, abstract

Can take up to 4 years or longer for patents to receive approval

What are Patents used for?A way of publishing information and preventing others from obtaining a patent

Prevents others from using, selling, manufacturing or importing the invention

Sell patent to third parties

Funding initiatives (V.C.s)

License to third parties to enable third party to use the invention

Extension to 20 year period

Supplementary Protection Certificates

Extension of up to 5 years to the term of patents in the field of pharmaceutical and agrochemical products

Recognises the length of time it takes to obtain regulatory approval for these products

The Patent Box : overviewDoes the business hold a qualifying patent or patent rights?

Does the business receive qualifying income related to the qualifying patent?

Calculate total profits attributed to qualifying income

Remove routine profit to calculate residual profit on qualifying income

Attribute residual profit to patent and non-patent IP to calculate patent box profit

Patent Box: which patents qualify?

Patents granted by the UK’s Intellectual Property Office (IPO) and the European Patents Office (EPO)

Consideration being given to allow patents granted by the national patent offices of some other EU member states as long as that state operates a similar examination process before granting a patent

Include supplementary protection certificates

Regulatory data protection and plant variety rights

Unlikely to include US patents

Patent Box: Patent ownership

Companies with legal ownership

An exclusive licensee of a patent (can be limited by field or territory)

A company that has acquired the patent

A company that has been involved in a partnership, joint venture or a cost sharing arrangement with the proprietor

The Patent Box: Qualifying income

Broad scope of worldwide income from inventor covered by a current valid patent including:

Patent royalties and other income from licensing

Income embedded in patented products

Income from the sale of patents

Sale of a patentSales of patented productsIncome attributable to patents used in industrial processesDamages arising from patent litigationIncome arising while a patent is pending is included later once the patent is granted

How is the Patent Box profit calculated:

Determine the total profit attributed to the qualifying income

Remove the routine profit to calculate the residual profit on qualifying income

Determine what proportion of the residual profit is due to patents

Formulaic three step approach based on residual profit split method

The Patent Box Profit: Step 1

Start from taxable trading profit

Exclude:

R & D tax credit enhancement Finance income and expenses

Apportion remaining profit and expenses pro-rata on proportion of qualifying to total gross income

Where pro-rata apportionment is inappropriate consider divisionalisation

The Patent Box Profit: Step 2

Calculate the routine and residual profit

Routine profit - mark-up on tax deductible expenses

15% mark-up

Exclude from the mark-up

Outsourced costs Cost of materials and goods for resale Licence fees and royalties paid

Remaining profit is residual profit

The Patent Box Profit: Step 3

Remove residual profit generated by other IP

Multiply residual profit by ratio of R & D expenses to R & D plus marketing expenses

Two other possible combinations

Result = Patent Box profit

Taxed at 10%

Patent Box losses!

Patent box computations may give rise to patent box losses

No compulsion to take into account in current year

Carry forward against future Patent Box profits

Possibly set against Patent Box profits in other group companies

Can opt out of Patent Box regime at any time - can’t then opt back in for 5 years after opting out

When will it all start?

Consultation ceased on 2 September 2011Draft legislation expected in Finance Bill 2012Expected to be legislation in April 2013Proposal is to include all existing patents rather than just new patentsPhase in the benefit

2013/14 2014/15 2015/16 2016/17

2017/18

Proportion of full benefit available

60% 70% 80% 90% 100%

How does the UK Patent Box Compare?

Patent Box already exists in a number of countries

Netherlands – 5%

Luxembourg – 5.72%

Belgium – 6.8%

Hungary – 9.5%

France – 15.92%

Malta – profit from patents is exempt from tax

What impact will the UK Patent Box have?

Comments from the Institute of Fiscal StudiesThe patent box regime “will do little to address market failures that discourage innovation. The patent box…will be expensive and will predominatently benefit a few large companies,”

Comments from Andrew Witty, CEO of GlaxoSmithKline“The patent box is exactly the sort of active, long-term and creative support that we need from the government to ensure that the UK remains an attractive place for highly skilled sectors such as pharmaceuticals.”

Thank you for listening

Richard Stanley2 Lace Market SquareNottinghamNG1 1PBTelephone: 0115 945 4300E-mail: richard.stanley@smithcooper.co.uk