What is the patent box?
The Patent Box is an opt-in scheme that enables UK based companies to apply a reduced corporation tax rate of 10% on a substantial part of the worldwide profits arising from selling patented products, using patented processes and exploiting patents, where the patents are granted by the UK Intellectual Property Office (UK IPO), the European Patent Office (EPO) or the national patent offices of certain EEA states.
The reduced tax rate can apply to the profit made from a product that incorporates a patented component, even where the patented component is itself only a minor part of the product. The component must contribute to the working of the product to qualify the product for Patent Box; i.e. the patented component must not be redundant from a technical point of view. In addition, the profit from an entire range of products that each incorporate a particular patented component can be included in the Patent Box.
Profits derived from worldwide license fees, royalties and court awarded remunerations (e.g. damages) can also be included in the Patent Box, as can profits derived from the use of a patented process.
The Patent Box became active from April 2013. The tax reduction is being introduced in a phased manner, as below.
- Profits in 2013/14: 60% benefit of reduction.
- Profits in 2014/15: 70% benefit of reduction.
- Profits in 2015/16: 80% benefit of reduction.
- Profits in 2016/17: 90% benefit of reduction.
- Profits in 2017/18 and later: Full benefit of reduction.
Who benefits from the patent box?
A UK company that pays UK Corporation Tax can benefit from the Patent Box, provided that the company qualifies for the Patent Box and holds a qualifying Intellectual Property (IP) right.
Qualifying intellectual property right
A qualifying intellectual property right is any of the following:
- A patent that has been granted by any of the UK Intellectual Property Office, the European Patent Office, or the national Patent Office of any of Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden;
- A Supplementary Protection Certificate (SPC);
- A plant variety right; or
- A data exclusivity right.
Patent applications are not qualifying IP rights. However, when a patent application grants it becomes a qualifying IP right, and the Patent Box tax reduction can be applied retrospectively to profits earned in accounting periods up to six years before grant of the patent, provided the company elected into the Patent Box for those accounting periods.
A UK company that is the holder of a qualifying IP right is a qualifying company and can elect into the Patent Box. The company can benefit from Patent Box relief for any of the accounting periods for which it is elected into the Patent Box and is a holder of the qualifying IP right.
A UK company that holds an exclusive license for a qualifying IP right is a qualifying company and can elect into the Patent Box. The company can benefit for Patent Box relief for any of the accounting periods for which it is elected into the Patent Box and is the exclusive licensee of the qualifying IP right.
A UK company that is not a holder or exclusive licensee of a qualifying IP right, but that is part of a group of companies that have qualifying IP rights, can also elect into the Patent Box, provided that the company either developed the group’s IP portfolio itself or is actively managing substantially all of the qualifying IP rights in the portfolio. Active management includes planning and decision making relating to developing or exploiting at least a substantial part of the qualifying IP.
Getting a product into the patent box
To get a product into the Patent Box you need a granted patent that covers the product, or a patent that covers a component that contributes to the working of the product. The patent needs to have been granted by any of the UK IPO, EPO, or the national Patent Office of any of Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden.
The Patent Box benefit applies to worldwide profits for a product or range of products, and includes profits from sales of the product(s) in countries where no IP right is held. This means that a single UK patent is enough to get the worldwide profits generated by a particular product or range of products into the Patent Box.
Getting a process into the patent box
Profits derived from patented processes can also be entered into the Patent Box. The requirement is the same as for a product; that is, a patent that covers the process that has been granted by any of the UK IPO, EPO, or the national Patent Office of any of Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden is required.
The main difference with a patented process is that there is unlikely to be a clear definition of the profits derived specifically from the process. In anticipation of this the Patent Box legislation sets out a procedure for determining the profit attributable to a patented process. Your tax adviser will be able to provide further details. However, in many cases it is possible to obtain a patent that explicitly covers both a process and the end product or component derived from that process, meaning that it should be possible to avoid having to use this more complex procedure.
How can we help?
The potential savings that the Patent Box offers may well have shifted the results of a cost-benefit analysis for many UK companies considering patent protection for their innovations. Inventions that previously remained confidential (e.g. as trade secrets) may now justify the initial cost of patent protection due to the savings created by the Patent Box over the lifetime of a patent. This, of course, needs to be balanced against the fact that all patent applications are published 18 months from filing, meaning that details of the invention are released into the public domain.
A.A. Thornton & Co has extensive experience in drafting patent applications in a wide ranging set of technical fields. We prosecute a large number of patent applications directly at the UK IPO and EPO and are in contact with a worldwide network of associate attorney firms that we work with closely in order to offer our clients the option to obtain patent protection anywhere in the world. Our attorneys would be happy to advise and assist with regards to obtaining a patent in general, as well as specifically with the Patent Box scheme in mind.
We are able to obtain feedback from the UK IPO regarding the patentability of an invention before the patent application in question publishes, allowing an informed decision to be made as to whether to proceed with a patent application or to keep the invention secret. We are also able to give advice as to whether an existing patent covers a particular product or component in order to determine Patent Box eligibility.
Please do not hesitate to contact us if you would like to discuss any of the topics discussed above.