New Patent Box scheme will bring tax savings

Significant tax savings are available under the Government’s research and development (R&D) relief scheme for many businesses.

In excess of 52,000 claims have now been made for such R&D tax credits, and the total relief claimed since the scheme was launched stands at £5.9bn (with £5.6bn paid).

But what happens once a product leaves the R&D stage, and becomes subject to a patent? The R&D tax credit is no longer available, but a new Government initiative is due to bring about a tax break for companies in respect of profits derived from patented technology.

The Patent Box scheme starts on April 1, 2013, and reduces the rate of corporation tax in respect of the proportion of profits derived from various income sources from patents.

The reduction will be phased in over a period of four years, with 60 per cent of the benefits being achieved in year one. By 2017, corporation tax rates on intellectual property (IP) profits will be 10 per cent, as opposed to the current level of 24 per cent.

However, businesses must begin to consider and make a number of decisions regarding:

  • Whether the Patent Box regime justifies incorporating your business;
  • Whether patent rights licensed to another company grant sufficient exclusivity to enable profits to qualify for the scheme
  • Whether group companies holding Intellectual Property meet the ‘active ownership’ condition
  • Timing of qualifying IP sales
  • Are the business’ activities meeting the qualifying development criteria?
  • If and when to elect into the Patent Box Scheme.

There are many industries which will benefit from this change – engineering and manufacturing companies, pharmaceutical businesses and chemical companies are just a few examples.

The new rate will apply to worldwide profits arising from UK patents and even those granted by the European patent office. It will be available to all relevant businesses across any sector or industry. The relief will apply to profits arising from Patents already held, and will even apply to those profits generated in the patent pending period.

However, there is significant work to be done before this. Businesses which can qualify – for instance those which hold patents granted in the UK or Europe, those with patents pending or those which claim R&D tax credits on an invention which could be patented – must begin to prepare early.

Systems and procedures must be looked at as a matter of urgency. Professional advisors will take a look at everything from whether there are more inventions that can be patented, to reviewing licensing agreements.

The Patent Box scheme will mean that the interests of British businesses are not just protected when an invention is patented, but also rewarded thanks to the cut in the tax bill.