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Some Points Worth Noting About The Patent Box...

Some Points Worth Noting About The Patent Box...

It’s not often that the topics of taxation and patents make for very interesting reading, especially in the same sentence! However, the UK Government’s decision to introduce a reduced corporation tax rate to 10% for patent related income is certainly generating a lot of press interest. It’s of even more interest north of the border with GlaxoSmithKline attributing their decision to expand operations in Irvine and Montrose due to the lower tax rate and the fact that Aberdeen has been attributed as being one of the most innovative cities in the UK.

So what’s worth noting about the regime? Here’s 8 key points to consider:-

  1. What patents qualify? All patents granted (not applications) by the UK Intellectual Property Office or the European Patent Office qualify. Other national patents benefit. This list is subject to review (for the full list see http://www.ipo.gov.uk/types/patent/p-patentbox/p-patentbox-qualpat.htm) but notably, US patents are not included.
  2. Who can benefit? A qualifying patent includes patents registered in a company’s name but also if a company has an exclusive licence to use a patent (where no one else can make use of the patent - even to the exclusion of the patent proprietor).
  3. Right to develop – If you have an exclusive licence, the licensee needs to have the  right to develop the patent included within the licence.
  4. Extent of exclusivity- you can limit your licence to territories, but only to the extent that the income generated is attributable to the exclusivity. In other words, if you have an exclusive licence in Tonga, you couldn’t benefit from income generated in the UK if the licence were non-exclusive in the UK.
  5. Active ownership – You need to do more than just hold on to the patent (known as the “active ownership” condition).  This does not seem to mean that a holding company couldn’t benefit from the regime, but the holding company would need to actively make decisions relating to the patent. Board minutes or reports recording developments would be helpful to document use.
  6. What products? Income from sales of the patented items or products using a patented process can qualify. Similarly, products which incorporate a patented item would qualify....within reason.... (but that’s probably the subject of a whole other blog post...!)
  7. 10%... not quite yet - Whilst patent profits will qualify for 10% tax rate, the relief will be phased in over 5 years with 60% of patent profits taxable at the lower rate in the first year (1 April 2013).
  8. Complimentary regime - The patent box regime applies in addition to the long running research and development tax credit regime.

It’s sensible to look into the regime if you make use of a patent - especially if you are the owner of the patent. If you benefit from a patent licence you should be checking the terms of your licence to see if you qualify, and if not, perhaps open up discussions with your licensor to renegotiate the terms of the licence - especially if you know that in practical terms, you are the only party exploiting the patent.

Ross McKenzie
Senior Solicitor