GlaxoSmithKline recently announced that it is to invest more than £500m in the UK’s research and development sector, creating 1,000 jobs. The Patent Box, which the Government had been consulting on since November 2010, was cited as a key influence in making this investment in Britain rather than elsewhere.
The Patent Box was formally announced in the recent Budget as an initiative that would encourage innovation and growth. It seems to have done so, making the UK an appealing and dynamic location for organisations that derive income from patents, particularly in the technology, manufacturing and R&D sectors.
What is the Patent Box?
The Patent Box is a form of tax relief that means that organisations will be able to elect to pay UK corporation tax at a reduced rate of 10% on profits attributable to qualifying patents.
The relief will also apply to certain lesser-known intellectual property rights, namely plant variety and data exclusivity rights. The latter is an intellectual property right relied upon in the pharmaceutical industry to protect drugs in their infancy while awaiting regulatory approval.
This reduced rate will be phased in over a five year period from April 2013.
What is a ‘qualifying’ patent?
In essence, a qualifying patent is one that has been granted either by the UK Intellectual Property Office (IPO) or by the European Patent Office. However, it is the Government’s intention to extend the Patent Box regime to patents granted by other EU Member States which have similar examination and patentability criteria as the UK. The list of qualifying jurisdictions is still to be confirmed.
While certain concessions have been made to accommodate group structures, in order for an organisation to claim the relief it must either hold the qualifying patent or have an exclusive licence to use the qualifying patent within a particular territory – sole licences will not qualify. It is worth clarifying here the distinction in the UK between an exclusive licence and a sole licence: if your organisation grants a licence to another party to use one of your patents on an ‘exclusive’ basis, but your organisation retains the right to use that patent itself, then this will actually be a sole licence.
As well as holding qualifying IP (or having an exclusive licence to use it) companies claiming the relief must also meet certain development conditions. The company seeking the relief must either be:
- creating or making a significant contribution towards the creation of the patented innovation; or
- further developing the patented invention or developing a product that incorporates the patent.
Which profits are attributable to a patent?
Assessing ‘profits that are attributable to a patent’ involves the application of a formula, which I shall leave accountants and tax advisors to comment on… Side stepping that, the definition of attributable profits is encouragingly wide and will apply to worldwide income generated from the qualifying right in the patent. Of course, the relief is a reduced rate of 10% UK corporation tax on worldwide income, and other taxes in other countries may be applicable.
The UK relief will cover a broad range of income streams. It will apply, as may be expected, to royalties, licence fees and income from infringement proceedings, but it will also encompass income from sales of patented products and, notably, will extend to the sale of products that incorporate patented technologies. This will be a very appealing aspect of the UK Patent Box, particularly to companies within the manufacturing sector.
On May 4, 2012