Patent box

Take advantage of impending patent tax relief

A leading intellectual-property lawyer has urged companies and entrepreneurs to take advantage of tax relief on patents.

The relief is available from 2013/14 and Adrian Chettle, of Withers and Rogers, says it is too good to miss, rather than being too good to be true.

He said: “This scheme will commence next year and rumour is that £1 billion has been set aside to cover the reduced tax take. It is too good an opportunity to miss.”

David Grindrod, of the University of Warwick Science Park, said: “Many of the companies based here at the Science Park will be extremely interested in this development as they are exactly the type of company this is aimed at.”

Patent Box tax relief quick guide, by Withers and Rogers partner Adrian Chettle C.Eng. F.I.Mech. E. (Chartered and European Patent Attorney)

Government wishes to stimulate innovation and development of products and processes in the UK.

A substantial reduction in corporation tax is available from 2013/14 for income obtained from owning or licensing granted patents. Tax savings of at least 25 per cent should be achievable in practice, and some companies will obtain close to the maximum relief of about 55 per cent.

The savings are large enough to warrant filing of a UK patent application where previously the commercial justification was hard to find. Worldwide income counts, even if only a UK patent exists, provided that this income washes through a UK company paying corporation tax.

Tax relief builds up in the period whilst a patent application is pending, and is released in the tax year that the patent is granted. Some foreign patents will also qualify, but not US patents. Existing patents qualify immediately.

One hundred per cent of the income from product patents will qualify for the scheme. Process patents will also qualify, but at the rate of an arm’s length licence dependent on practice in the relevant area of technology (say five to 20 per cent).

Relief is available on income from patented products, and on income from complex products which incorporate patented products as part of the design. Thus a patented suspension part of a car will bring the whole value of the car in to patent box tax relief. Spare parts for complex products also count even if not covered by the patent.

The qualifying income will be reduced according to the ‘normal’ profit which a business may make (roughly 10 per cent), and additionally if valuable marketing assets are applied (such as famous trade marks) to increase the expected profit. These deductions are negotiable based on relevant evidence.

Relief is available for patent owners and exclusive licensees of patents. Existing and anticipated licences must be carefully drafted to avoid a loss of tax relief. Licences can be granted limited to geographical area or to an exclusive field of use – so several exclusive licences are possible (but the UK cannot be divided geographically to multiply relief). Passing relief to a licensee might be expected to generate a better royalty return for the licensor.

The available tax relief is potentially so great that it should be costed into any business plan. Fortunately narrow scope patents will qualify, are relatively quick to get and are resistant to third party attack – so some certainty of tax relief is available.

A simple UK patent might require a budget of £5-8000, could be granted in less than two years, if accelerated and passing the Patent Office tests for invention. Narrow scope patents pass these tests more easily.

This may all sound too good to be true, and there are 83 pages of guidance for tax accountants, who will have to prepare the claim. However, this scheme will commence next year and rumour is that £1 billion has been set aside to cover the reduced tax take. It is too good an opportunity to miss.

A brief note such as this cannot deal with all of the detail, and is in consequence a broad summary of the terms and conditions which will apply. Specific advice should be sought in respect of particular circumstances.

©2012 Withers and Rogers LLP