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Patent Box, 7th August 2012  - Click for larger version Patent Box, 7th August 2012

After extensive consultation, draft legislation around the UK’s new Patent Box tax regime has finally been issued.

The aim of the Patent Box is to “encourage companies to locate the high value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK’s position as a world leader in patented technologies”.

- What is the potential benefit to my company?

From 1 April 2013 companies can elect to apply a 10% rate of corporation tax to all profits attributable to qualifying intellectual property.

This compares to the main rate of corporation tax of 23% from 1 April 2013.

Where patents are pending, additional relief can be claimed once the patent is granted in respect of up to the previous six years.

The full benefit of the regime will be phased in over 5 years i.e. 60% of the benefit will be available from 1 April 2013, increasing to 100% by 1 April 2017.

- What types of intellectual property will qualify?

Patents granted by the UK Intellectual Property Office (‘IPO’) under the Patents Act 1977 and patents granted by the European Patent Office (‘EPO’).

Supplementary protection certificates which are granted by the UK IPO or by the EPO, including paediatric extensions.

UK and European Community Plant Variety rights and certain UK and European regulatory exclusivity rights, for example regulatory data exclusivity rights granted in respect of medicinal, veterinary and plant protection products, and marketing exclusivity granted to orphan status medicines and medicines for paediatric use.

In most situations, your company or group will require to satisfy one of two conditions:

1. Development condition i.e. your company has been involved in the innovation behind the patent or the application of the patented invention.

2. Ownership condition i.e. if your company is a member of the group, your company must ‘actively manage’ the intellectual property.

Note that the Patent Box does not extend to intellectual property such as trademarks and brands.

- What are the main types of income that qualify?

There are 4 main income streams that can qualify as relevant intellectual property income:

1. Income from the sale of a patented invention, or products which incorporate it.

2. Income from exclusively licensing the patent (i.e. royalties or licence fees).

3. Outright sale of the patent rights.

4. Infringement income (damages on account of profits).

- How are eligible profits calculated?

There is a 5 stage calculation to identify the proportion of your company’s profits which qualify for the lower rate of corporation tax:

1 -3. This involves splitting qualifying and non-qualifying income and profits from patents.

4. Subtract a ‘routine return’ of 10% on certain costs to leave the qualifying residual profit.

5. Deduct a marketing/brand royalty, or apply the small claims treatment which removes 25% of the qualifying residual profit.

- Patent Box doesn’t come into operation until April 2013, so why should I start to think about it now?

The greater the qualifying income, the greater the potential benefit, therefore start the patenting process as soon as possible (it can be time consuming!).

Under the proposed legislation there are different methods for calculating the value of Patent Box profits; consideration should be given to which method is most advantageous to your business.

Forecasting the potential benefit of Patent Box will help manage future tax cash flows.

Informal intragroup licensing arrangements should be formalised prior to April 2013 to ensure that intellectual property which can fall into the Patent Box does, and that royalty rates are optimised.

Please contact us to discuss further.

Last updated: 10.50am, Tuesday 23rd October 2012

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