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Thinking inside the Box

Richard Beavan provides guidance on how to get the benefit of the new HMRC Patent Box Relief.

Patent Box Relief (PBR) is a tax break designed to promote innovation.  Introduced in the Finance Bill 2012, profits made from exploiting patents that a company has developed will attract corporation tax at a reduced rate of 10% (down from the current main rate of 24%). 

PBR is being phased in, with 60% of the benefit applying to profits generated from 1 April 2013, increasing by 10% each year until 1 April 2017.

What profits does PBR apply to?

PBR applies to profits derived from:

  • the licensing or sale of patent rights;
  • sales of a product incorporating the patented invention (anywhere in the world);
  • use of the patented invention in the company's trade (known as notional royalties); and
  • compensation from third parties who have infringed your patent rights.

PBR does not apply to profits derived from routine manufacturing or profits derived from the exploitation of marketing intangible assets.

PBR applies to patents granted by the UK Patent Office, the European Patent Office or the patent offices of specified EEA countries.  There are a number of other categories which will be eligible for PBR (for example, rights concerning plant varieties and medicinal rights).

Who can qualify for PBR?

To qualify, the company needs to satisfy two main conditions:

  • it must have undertaken qualifying development by making a significant contribution to
    • the creation or development of the patented invention; or
    • a product incorporating the patented invention,
  • if the company licenses-in qualifying patent rights, the licence must be exclusive and country wide.

The aim is that PBR can only be claimed by companies which are actively involved in developing new technology. 

If the company is within a group then it can qualify for PBR if another group company satisfies the "qualifying development" condition in 1 and if the company claiming PBR plays a significant role in managing the group's portfolio of qualifying IP rights.  This is designed to prevent passive IP holding companies from benefitting from PBR.

What mounts to a "significant contribution" is a matter of judgment, but HMRC has indicated that it would include coming up with the original idea, testing or enhancing the invention, or developing a new application for an existing invention.  It wouldn't apply, however, if the company had simply found a new market for an existing invention.

Boxing Clever - some additional know-how

Here are a few further points to consider:

  • Patent pending?- Although the scheme does not apply to profits from inventions pending patent approval, if approval is granted, profits for the last six years can be added to the calculation of profit in the first year.
  • Acquisitions- qualifying companies are still eligible for relief after a change of ownership, but only where development activity continues after the purchase for at least 12 months. 
  • Non-exclusive licences- if your company grants or receives any non-exclusive licences, consider converting them to exclusive agreements, as PBR will only apply to exclusive licences. 
  • Tech haven -Interestingly, there's no need to have developed the technology in theUK.  If you own qualifying patents, consider setting up a UK-based IP management company.

A corporation tax break of 14% could be significant for a business which exploits its patented intellectual property.  There is plenty of useful information available on the HMRC website. Also, ask your solicitor, accountant or patent agent for more information.

No PBR? Try R&D

Finally, PBR should not be confused with the tax credits which can be claimed by SMEs for money spent on research and development.  Since April 2012, for every £10,000 of qualifying R&D expenditure incurred, an SME can claim a deduction of £22,500 from its taxable profits.  If the company is loss-making it can choose to increase the value of its carried forward losses, or to surrender the tax credits in return for a cash payment.  For a surrender, HMRC will repay £25 for every £100 of qualifying expenditure.

This article first appeared in the GrowthBusiness newsletter and the Small Business Newsletter on 6 August 2012.

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