The UK Patent Box regime aims to incentivise companies to retain and commercialise existing patents and to develop new innovative patented products. The regime allows companies to apply a lower rate of corporation tax to qualifying worldwide profits attributable to qualifying patents and other similar intellectual property (“IP”) rights. It forms part of the UK Government’s growth agenda to encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK’s position as a world leader in patented technologies. The regime came into force on 1 April 2013 and will be phased in until April 2017.
The headline rate for qualifying profits will be 10% (phased in by April 2017). However, the effective tax rate is likely to be higher as certain expenses are disallowed and certain profits are excluded from the regime. Therefore, the UK Patent Box regime does not provide tax rates as low as can be achieved elsewhere in Europe (e.g., Luxembourg, Switzerland, Ireland, the Netherlands and Belgium). Companies that do not want to incur the cost and complexity of establishing separate IP holding companies are likely to welcome the new regime as are companies with existing IP structures that are concerned about recent ministerial statements about tackling tax base erosion.
Qualifying IP rights
A company must hold “qualifying IP rights” to benefit from the regime. These include:
- patents granted by the UK Intellectual Property Office (“IPO”), the European Patent Office (“EPO”) and certain other EEA countries;
- supplementary protection certificates granted by the UK IPO or the EPO;
- UK and European Community Plant Variety Rights; and
- certain UK and European regulatory exclusivity rights.
Such rights must either be owned by the company or exclusively licensed to the company. The regime requires an exclusive licence to grant the company rights to the exclusion of all others in at least one territory and the right to either bring proceedings for infringement without consent of the owner or the right to receive at least the greater part of any damages awarded for an infringement.
The regime does not include other IP rights, such as trade marks or design rights.
A company also needs to satisfy a “development condition” in relation to its qualifying IP rights. A company must have either created or significantly contributed to the development of the invention claimed in the patent (or a product or process incorporating such invention) or performed a significant amount of activity for the purposes of developing the patented invention (or any item or process incorporating such invention). Determining whether a “significant” contribution has been made will be a question of fact.
Active ownership test
If a company holds qualifying IP rights and is a member of a group, but has not itself carried out any qualifying development work on its portfolio of qualifying IP rights, it must also meet the “active ownership” test. To qualify for the regime, the relevant company must perform a significant amount of management activity in respect of its whole portfolio of qualifying IP rights.
Qualifying IP profits
A company may apply for the lower rate of corporation tax on its “qualifying IP profits”, which include sales income, licence fees, sale or disposal proceeds and damages from infringement actions. Such profits can be calculated using HMRC’s seven step test. Such qualifying IP profits are then taxed at the applicable patent box rate (15.2% from 1 April 2013 reducing to 10% from 1 April 2017).
Patent Box losses
If a company has made a loss from its qualifying IP rights, it can set them off against the relevant IP profits of other trades carried on by the company or against the relevant IP profits of group companies, or it can carry them forward. However, a company cannot set off patent box losses against anything other than relevant IP profits. This should be considered when a company decides whether or not to opt into the regime.