Encouraging innovation in the UK – the new Patent Box
By Julie Bryant, Haines Watts
In April 2013, the UK Government introduced a new incentive for innovative high-tech companies to invest in the UK. In addition to the generous tax credits already available for qualifying research and development expenditure, there is now a "Patent Box" which allows companies to benefit from a reduced corporation tax rate of 10% on profits generated from qualifying patents. This new incentive further demonstrates the UK Government's desire to make the UK an attractive place to do business, and builds on other recent initiatives such as the dividend exemption, the reformed controlled foreign company rules and the reducing main rate of corporation tax.
The full benefit of the regime will be phased in over five years, with 60% of the benefit in the year starting 1 April 2013 (i.e. an effective rate of 14%), increasing to the full amount of the benefit in the year starting 1 April 2017.
For profits to get into the box, there are of course various conditions to be satisfied. The organisation must be within the charge to corporation tax (i.e. it must be a company!) and it must hold a patent or a countrywide exclusive license to exploit the patent. The company must have actively developed the patent or a product incorporating the benefit. This incentive is not designed to be available to patent "trolls", those that buy up patent rights with a view to aggressively enforcing those rights against accused infringers.
If a company meets all the relevant conditions, it can choose to elect into the regime to benefit from the reduced tax rate. This is a one-off election and, once made, the company remains in the box until it decides to revoke the election. If it does revoke the election, it cannot elect back into the box for a further five years.
The reduced Patent Box tax rate will apply to worldwide profits arising from qualifying patents, which could include profits from selling patented products or products incorporating the patented invention, as well as profits from licensing out or selling patent rights.
There are many good reasons for companies to ensure important inventions are protected; the new Patent Box adds another to the list. Companies that have a patentable product or process should consider whether they should apply for patents in order to benefit from the reduced corporation tax rate. Where a new patent is granted, the UK HM Revenue & Customs will allow a retrospective claim from the date the patent application is filed.
A largely formulaic approach is used to calculate the Patent Box profits based on complex rules within the new legislation. In order to benefit from the Patent Box regime, companies will need to ensure that adequate systems are in place to trace patents into products so that the relevant income and costs that are attributable to the qualifying patents can be reliably tracked for the purposes of the Patent Box profit calculations.
To help companies to take advantage of the new regime, many UK accountants are teaming up with patent attorneys, to offer a streamlined approach for companies to follow. Companies contemplating the Patent Box regime should seek advice from a UK advisor to help them devise a suitable strategy to benefit from this attractive new tax incentive.
Haines Watts, over 60 offices throughout the United Kindom
Julie is a Chartered Accountant and Chartered Tax Adviser with over twenty years experience of both UK and international tax, having previously worked at Andersen, Deloitte and BDO. She advises companies from large corporates to owner-managed businesses on a wide range of issues including mergers and acquisitions, disposals, restructurings and employee share ownership arrangements. Her international work includes assisting with overseas expansion and reorganisation as well as transfer pricing matters. She is a member of the International Tax Sub-Committee of the Chartered Institute of Taxation.
published: November 2013