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Patent Box is a Government scheme to reduce Corporation Tax paid by companies on profits generated from the sale of patented products and services to a nominal 10% taxation rate.
In November 2014 it was announced that the initial Patent Box will be closed to new entrants. This change came into effect retrospectively on 1 July 2016 following the Royal Assent of the Finance Act 2016 on 15 September 2016. Both the old and the new schemes will run in parallel until June 2021, when the initial scheme be closed completely.
Where a company does all of its research and development for a particular invention in the UK the company will be able to benefit to the same extent as they could under the original scheme. Conversely, where a significant amount of R&D for a particular invention is undertaken by the company outside the UK or by a related company (i.e., a group company, whether in or outside the UK), the new scheme pairs back the amount of tax relief available. This change is to ensure that the tax benefit closely follows the R&D work, and is referred to as the modified nexus approach.
UK companies who pay Corporation Tax can benefit from the Patent Box proposals by paying a reduced rate of Corporation Tax on profits resulting from patented technology. In this instance, profits from trades anywhere in the world are included when linked to qualifying Intellectual Property Rights. Companies must also meet the development conditions and some companies will also need to satisfy the active ownership conditions.
See How is the development condition met?
See Are there any additional requirements on a company which is a member of a group?
The main Intellectual Property rights that qualify for Patent Box are patents which have been granted by either the UK Intellectual Property Office or the European Patent Office. In addition, patents granted by patent offices within the following European Economic Area (EEA) countries will be considered as eligible: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden. These countries have been selected as they are deemed to have similar patentability and examination criteria to that of the UK.
Other rights which qualify for the Patent Box are:
A Supplementary Protection Certificate is an additional monopoly that comes into force after the expiry of a patent upon which it is based. This type of right is available for pharmaceutical products and for agrochemicals. These products are potentially allowed to benefit from an extended monopoly because they require regulatory approval which can delay the length of time that it takes for them to reach the market. Consequently, Supplementary Protection Certificates attempt to encourage innovation by compensating for the long time needed to obtain regulatory approval of these products.
A plant variety right is a right to exclusively grow a variety of a plant. Plant varieties cannot be protected through the patent system but can be protected through this separate regime, in accordance with the International Union for the Protection of New Varieties of Plants (UPOV) Convention.
Data exclusivity rights refer to the protection of clinical test data required to be submitted to a regulatory agency to prove safety and efficacy of a new drug. This data is typically very onerously obtained and allows pharmaceutical companies to protect the significant investment that they make in order to bring a drug to market. These rights are used by a patent right holder to prevent generic drug manufacturers from relying on this data in their own applications for regulatory approval.
No - US patents are not qualifying patents because the US Patent and Trade Mark Office applies different patentability and examination criteria to those applied by the UK Intellectual Property Office.
See What Intellectual Property Rights qualify for Patent Box
No, however, if the company does not own the qualifying IP right then it must be an exclusive licence holder.
An exclusive licence allows the licensee to work an invention to the exclusion of every other person including the right owner. For example, if company A owns a patent to a particular method of making paint and exclusively licences the patent to company B then company B will be the only company able to make paint in that way. Anyone else including company A will be unable to use that method.
Examples of exclusive licensees are:
Scenario 1 - where a group of companies exists, one of those companies may be an Intellectual Property holding company which owns the rights and licences them to another company within the group, which is a trading company. In this instance, the trading company needs to have an exclusive licence to be able to benefit from the Patent Box.
Scenario 2 - the company which owns the patent may not wish to exploit the patent in a particular jurisdiction (usually geographically defined), or for a particular field of technology. In this case, the patent owner may decide to licence the patent to a third party to exploit the invention.
The 'development condition' is met if a 'relevant company' (as identified above) has carried out qualifying development work in relation to the right. This development could be the creation of a significant contribution to an invention or it could be performing a significant amount of activity for the purposes of developing the invention or any item or process incorporating the invention. This could even be development in how the invention can be used or applied. The identity of the 'relevant company' will depend on the corporate structure within which that company exists and a number of scenarios are envisaged by the draft legislation.
The company can generate trades which qualify for Patent Box relief by undertaking any of the following activities:
Furthermore, both patent owners and exclusive licensees can benefit from Patent Box relief at the same time. For example where a patent is licensed then both the licensor's royalties and the licensee's sales can be taxed at the reduced rate.
Profits resulting from the sales of any qualifying patented products can benefit from Patent Box relief. In addition, sales of items incorporating a qualifying item can benefit from the Patent Box, even if the patented part is only one of many components in the larger item.
No, there are certain deductions to be made from the total gross income of a trade.
These deductions are made in order to ascertain the profits attributable to patents and to isolate profits resulting from other sources.
If a company makes profit from both patented and non-patented activities then only the patented activity will be eligible for Patent Box relief. This profit from the patented activities is known as 'relevant IP income' (RIPI).
A routine return on expenses is deducted from the relevant IP income. This results in the Qualifying Residual Profit.
A deduction is made for a routine return because this is the profit that the business might be expected to make if it did not have access to unique Intellectual Property and other intangible assets.
The routine return figure is calculated as a 10% mark up of certain expenses such as Corporation Tax, deductions made in respect of personnel, premises (if tax-deductible), plant and machinery (including capital allowances) and miscellaneous services.
A marketing assets return figure is deducted from the qualifying residual profit, which results in the relevant IP profits.
This deduction is to exclude any profit generated from established brands from the qualifying profits.
A company which is a member of a group must also meet the active ownership condition. To meet the active ownership condition, the company must perform a significant amount of management activity in relation to the right.
Management activity means formulating plans and making decisions in relation to the development or exploitation of the rights. This could relate to decisions to maintain protection in a country, to pay the annual renewal fees, grant licences, research alternative applications for the innovation or, licensing others to do so.
This will be determined by: