By Barbara McQuillan, Head of Tax, Henderson Loggie, Chartered Accountants
Intellectual property (IP) is fundamental to 40% of economic activity in the EU, according to a recent study from the European Patent Office. While the UK is at the forefront of research and development in many industries, the commercialisation of these activities has often been poor. In fact, although 15% of the world’s most cited research articles are generated in the UK, only 2.4% of global patent applications are made here and there are fears of a further reduction in the UK’s technological innovation.
Patent Box was introduced in April 2013 to address this situation by providing a financial incentive for the commercial exploitation of patented technology. Patent Box is a generous regime which HMRC has predicted will provide £1.1 billion of tax relief by 2019. Under this regime, companies can elect to apply a 10% corporation tax rate to worldwide profits derived from qualifying IP. Relief is available for patents granted by the UK Intellectual Property Office, the European Patent Office and by certain specified EU patent offices. However, patents issued by other countries, notably the US, Japan, France, Spain and Norway are not eligible.
Once a company has elected into the Patent Box profits from the patented item, and from any product containing the patented item, will be subject to corporation tax at 10%. For example, if a company which has developed a patented coating on frying pans elects into the Patent Box, all of the profits from the sales of those frying pans would be taxed at 10% rather than the current corporation tax rate of 23%. If the company has applied for a patent, the tax relief rolls up in the patent pending period and is given in full in the period in which the patent is granted.
Income derived from exclusive licences in respect of qualifying patents is also included in the Patent Box, as are other IP rights, including supplementary protection certificates, plant variety and data exclusivity rights. Pharmaceutical companies will benefit from an extra period of relief after a medicinal patent has expired to compensate for the extended length of time that their products take to reach the market.
To get into the Patent Box, companies with qualifying IP must have made a signicant contribution to the creation or the development of the invention claimed in the patent or to a product incorporating the patented item. This condition prevents companies acquiring other companies with patents solely to exploit the Patent Box relief. Companies in a group may also qualify if another group company has undertaken the development as long as the company owing the patent undertakes an active role in managing its IP portfolio.
The Patent Box legislation has now been in place for almost a year and there are preliminary indications that the introduction of the scheme is influencing companies’ behaviour, resulting in increased innovation in the UK. A recent example of this was GlaxoSmithKline’s decision to relocate £500m of existing manufacturing activities from Singapore into the UK and to invest an additional £200m upgrading UK plants and building a technology centre in Cumbria. The relief will also benefit small and medium enterprises (SMEs), including university spinout companies with patented inventions or licensed-in patents. However, a recent study by The Cambridge Design Partnership Research found that many SMEs are not aware of Patent Box and there was wide variability in the attitude to patenting in SMEs. The study concluded that if widespread participation in the Patent Box by all companies, regardless of size or sector, is to take place, HMRC will have to increase understanding of the benefits of the patenting process among SMEs. It has been estimated that the Patent Box could increase the net present value of a patented item by 10%, making the investment return more attractive.
Scotland has a tremendous track record over many years as a highly innovative country and with the introduction of the Patent Box all companies, and particularly SMEs, should be reviewing their IP strategy and existing product range to identify patentable technology. The inclusion of a patentable feature in a redesigned product could result in significant corporation tax savings.