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Law for Business

Knowhow - guidance - precedents

11 DEC 2012

Patent Growth in the UK: Patent Box

 

The annual European Inventor Awards were recently held in Copenhagen (14 June 2012), with no UK based winners. Will the introduction of the Patent Box next year help to stimulate UK R&D activity?

Patent Growth in the UK

The European Patent Office (EPO) established the awards for outstanding inventors six years ago. Although inventors from the UK have been recognised as runners up, the last UK based winners were in 2007(1) and 2008(2).

A recent Financial Times special report article was entitled "Invented in the UK, largely being developed elsewhere"(3). Universities are often home to industry funded research and development projects, but the FT article suggests that Europe has weaker connections between academia and industry compared with the US or Asia, which hinders the commercialisation of academic research.

The Patent Box

The UK Government now appears to have recognised this need for technology growth through R&D. It is now in the process of introducing the "Patent Box" tax regime to drive the commercialisation of intellectual property (IP) in the UK. The Patent Box essentially offers companies with profits attributable to qualifying patents and certain other intellectual property to elect to apply a reduced rate of corporation tax at 10%. The Patent Box legislation is currently in draft form and is due to be implemented from 1 April 2013 (with a phase in of the relief over five years). This regime could help to stimulate funding from qualifying companies into University based research projects.

What IP qualifies for the Patent Box?

This reduced corporation tax rate is set to apply to worldwide profits from the exploitation of patents granted by the UK Intellectual Patent Office (IPO) and the European Patent Office (EPO), as well as certain other intellectual property (such as data exclusivity and plant variety rights). The Government plans to finalise a list of other patent offices in EU Member States in which the reduced tax rate will apply later this year. However, until this time, it may be advisable to apply for patents through the IPO or EPO.

It is important to note that this patent box regime will apply to both new and existing patents, although the Government plans to phase the benefits in over five years, from April 2013.

What are the requirements?

Development: Companies will be eligible for this tax benefit if they (or a group company) have had sufficient involvement in the development of the patented product or process.

Ownership: Companies must either directly own the qualifying IP or hold an exclusive licence to commercially exploit the IP in at least one territory. Partners in partnerships and parties in cost sharing arrangements can also benefit if one of the partners or parties owns, or holds an exclusive licence over, the qualifying IP rights.

Active ownership: The Government's aim is to reward active patent innovation rather than rewarding the acquisition or passive holding of patents. Companies must either satisfy the development condition itself or, if a member of a group, must be performing a significant amount of management activity in respect of the qualifying IP.

How far does the Patent Box relief stretch?

This reduced 10% tax rate will apply to qualifying "patent box profits" worldwide. The Government proposed a complex formula in its consultation last year for working out the part of profit which would be qualifying for the reduced corporation tax rate. The rate will apply to royalties, licence fees, profits from the sale of patented products (or products which incorporate a patented invention) and to compensation and damages paid by third parties where a patent has been infringed.

It is envisaged that this will be a self-assessment process, although it is also proposed that HMRC will run a non-statutory clearance system for companies who are uncertain as to calculating qualifying profits and who want to ensure that anti-avoidance rules do not apply.

Gearing up for Patent Box tax relief

In order to be ready to capitalise on potential corporation tax savings from April 2013, qualifying companies should plan ahead by:

  • Assessing which existing IP could benefit: Generally, patents granted by the UK or European patent offices, plant variety rights and data exclusivity will be qualifying IP;
  • Assessing which future IP could benefit: Both existing and future IP can benefit from the Patent Box regime. Until a company has applied for a patent, it will need to ensure that confidentiality surrounding the proposed patent is preserved, else it risks losing its "novelty", which is a requirement for obtaining a patent. This can be done by ensuring that there are robust confidentiality agreements in place;
  • Reviewing patent licences: Even if a company does not own the patent, if it has an exclusive licence it may be able to benefit from the Patent Box. Companies may also want to amend the terms of existing non-qualifying licences or formalise any informal intra-group licences;
  • Considering group structure: Patents must be "actively owned". If a group company developed the IP, but the IP is passively or merely held by an IP holding company, then that holding company will not qualify for the Patent Box regime. In order to qualify, the IP holding company must play an active role in managing the IP. This active management includes granting licences (which could be to group members), researching alternative opportunities and/or making decisions as to how and where products (which incorporate the IP) are sold;
  • Checking evidence of development: For the patent to qualify the group company must have had sufficient involvement in the development of the patented product or process. Again, if the patent has not yet been applied for, preservation of confidentiality is key to obtaining a patent, and confidentiality agreements can assist here; and
  • Considering partnership and cost contribution arrangements: Corporate partners in a partnership can benefit from this tax relief as well as parties to a cost contribution arrangement. Some parties may elect in and some may not.

For more information on the detail and background of the Patent Box regime, please see our previous article here.

For more information please contact Rehman Noormohamed, Partner and Head of Intellectual Property or David Thompson, Associate in the Intellectual Property team at Michelmores.

Disclaimer: This information has been prepared by Michelmores LLP as a general guide only and does not constitute legal advice on any specific matter and should not be relied upon as such. We recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of this information.


  1. Professor Marc Feldmann (UK) European Inventor of the Year 2007 in the category "Lifetime achievement" for his research and work on autoimmune diseases.
  2. Douglas Anderson, Robert Henderson, Roger Lucas (UK) European Inventor of the Year 2008 in the category "SMEs/research". They developed a scanning laser ophthalmoscope (a proprietary medical device that generates a complete retinal exam with a low-level laser beam).
  3. Financial Times, Special Report "Engineering the Future" June 15 2012, by Pippa Stephens.

 

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