Thinking inside the Patent Box?

A tax policy for innovation

Research and development involves significant risk and cost and even a successful technical outcome does not always guarantee success in the market place. Despite this, innovation is vital for the competitiveness of the UK economy in a global market place. How should a tax system treat these issues to incentivise growth?

By creating the R&D tax credits and Patent Box regimes, the UK Government clearly believes in using the tax system as a powerful policy tool to promote innovation. It also incentivises the use of the patent system to protect ideas both at home and abroad in order to fuel export growth.

One of HMRC’s key initiatives, the “Patent Box”, represents a serious statement of intent by the UK Government to promote innovation, research and development in the UK. This can provide a tax break for those companies who have created inventions or developed patented products or services as and when those ideas become profitable.

Patent Box Overview

Under the Patent Box tax regime, a UK company will be able to obtain a reduction in its corporation tax liability in relation to profits derived from patented inventions. This relief is available to companies with patents operating in any industry, and also extends beyond patent rights to sector- specific rights available in the life sciences fields of human and veterinary medicines and plant varieties.

Although the full benefit of the Patent Box is being phased in over 4 years, the key feature of the incentive is that for relevant profits attributable to patents earned from April 2013 the special rate of UK corporation tax that can be applied is 10%.

The relevant profits can come from several sources: selling patented products; using patented processes; receiving royalties and other licensing fees; or from settlement payments or damages awarded in infringement proceedings. Importantly, profits attributable to products which incorporate only one patented component can also qualify in many cases. For example, this means that if a printer cartridge is patented, then provided the cartridge is bespoke to that printer and therefore a necessary component of the overall product, profits relating to the entire printer can be included in the Patent Box even if the printer itself is not a patented product. For further details see our summary on Qualifying Income.

This deduction from UK corporation tax may be claimed for income derived from patented products or processes arising anywhere in the world. Furthermore, it is not necessary for the product or process to be protected by a patent in each sales territory provided that the product or process is covered by a qualifying IP right in Europe. This is a useful incentive for companies to pursue export growth.


Innovation or development is a condition of the relief

In line with the Government’s policy objective, to qualify for the Patent Box the company must be able to satisfy the “development condition”. This requires that a company must hold the patent rights and also be actively involved in the creation of the patentable invention or the development of the product or process that is protected by the rights.

An effective policy?

The ramifications of the Patent Box regime may be wide-ranging and could influence big strategic decisions, from where to hold patents and conduct research, to more detailed operational matters, such as whether to apply for patents, strategies for the prosecution of patent applications, structure of corporate groups and the drafting of licence terms.

GlaxoSmithKline have reportedly committed £500 million to a new UK operation as a result of the introduction of Patent Box, with their CEO saying:

“The introduction of the patent box has transformed the way in which we view the UK as a location for new investments, ensuring that the medicines of the future will not only be discovered, but can also continue to be made here in Britain”

If your company is paying UK corporation tax and owns or licences patents, or indeed if you are unsure whether the Patent Box could have any relevance to innovation you have developed within your business, we would like to help you benefit from this valuable Government initiative. Please contact us about our Patent Box Services.

R&D tax relief

It can be some time before a new invention starts to become profitable. During the research and development phase, a company’s ongoing R&D costs can benefit from HMRC’s generous R&D tax credit regime.

In addition, where your patented IP does generate positive income, our specialists can ensure that your business benefits from both R&D Tax Relief and the Patent Box.

For more information, regarding Patent Box or R&D Tax Credits contact Gillian Abramson on:

Tel: 0113 261 1706 or 020 8037 1100
Email: gillian.abramson@taxadvisorypartnership.com