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The “Patent Box” – We lift the lid | 16 November 2011

The Government has announced plans to introduce a “Patent Box” – the effect of which is to reduce the rate of tax payable on profits attributable to patented inventions. In the current economic climate, with many analysts predicting little or even negative growth in the next few years, the patent box could offer businesses a way of achieving a substantial increase in net profitability. The scheme will not be introduced until 1st April 2013, and some of the details have not yet been finalised, but it is important to start thinking about the new regime now to make sure that firms are in the best possible position to take advantage of this significant opportunity. To help you to do this, we have summarised below some of the salient features of the Patent Box and highlighted some issues you might wish to consider.

The ‘Patent Box’ provides for a reduction in the rate of corporation tax to 10% on profits attributable to the worldwide sale of patented products and services, and will also extend to royalty payments received from patents, profits from the sale of patents, and some of the damages recovered in respect of infringement of a patent.
Note – the scheme only relates to patents, not other forms of intellectual property such as registered designs or copyright etc.
To claim the relief, you must have a granted UK or EP patent, the claims of which encompass the relevant product or service. (The Government has indicated that patents granted in some other jurisdictions may also create eligibility in the future). It follows that patenting innovations may become more popular than, for example, relying on trade secrets.
It also follows from point 1 that the relevant profits must accrue to a limited company, not an individual or a partnership, since only companies pay corporation tax. You might therefore want to consider changing your business structure if you do not currently operate as a limited company, although clearly other factors will need to be taken into account.
The Patent Box tax relief applies not only to patentees but also exclusive licensees.
The Patent Box scheme might well influence your patenting strategy: for example, it could be sensible to obtain grant of a patent on a first application with fairly narrow claims which nevertheless are broad enough to encompass your product or service, whilst pursuing broader protection in a second application. The narrow claims of the first patent should result in rapid allowance (and hence entitle you to patent box relief) and be easier to defend, whilst the second application could aim at obtaining a fuller scope of patent protection.
UK patents look likely to become increasingly attractive, as they are often granted more quickly than applications filed at the European Patent Office (due to the backlog at the EPO). Also, EP patents are more likely to attract a formal challenge to their validity (an “opposition”) than a UK patent, because they are likely to affect a larger number of potential infringers. Probably the best strategy in many instances would be to file parallel UK and EP patent applications, with the UK claims perhaps being narrower than those of the EP application (see point 6 above).

The Patent Box scheme is being phased in, with the full benefits not being available until 2017. However, it appears that the relief will be applicable retrospectively, in the sense that it will apply to all UK or EP patents, whenever applied for. The Government has also announced plans to liberalise the R&D tax credit scheme. These changes could be of real benefit to SMEs.

As further details of the Patent Box become available our advice may change – please get in touch with your normal Nash Matthews contact if you have any questions, and seek advice from your accountant