Switch on to patent box advice

by Michael Jaeger

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12 Oct 2012

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WITH THE COUNTDOWN to the introduction of the patent box regime well underway, some accountants still may not be ready to help their clients make best use of the potentially lucrative tax relief scheme.

While it's true the distinct lack of guidance from HM Revenue & Customs about how the new regime will be implemented is not helping, accountants could be doing more in some areas to familiarise themselves with patent box and consider how it might be applied to their clients' businesses.

If my own experience of speaking with advisors in the professional services sector is anything to go by, many would be surprised to find that patent box is applicable to more companies than they first thought. The amount of savings they could pass on to their clients in terms of a reduced tax liability would be significantly greater too.

For those that may be sceptical that HMRC will deliver on the government's promises, just look at the R&D tax credit scheme, which – despite its low take-up initially – is now making payments to loss-making companies to reward them for investment in R&D. This is serious stuff and the government is clearly prepared to back R&D investment all the way.

There are a number of areas that accountants may not yet be fully aware of in terms of the scope of the patent box regime and the opportunity it presents for their clients.

Know your qualifying profits
For accountants, a sound awareness of the criteria and benefits of patent box is essential, especially given the time it took for the full benefit of R&D tax credits to be realised and supported by HMRC. In addition, some accountants may be unaware of the range of income that could qualify for the incoming tax relief.

Appreciate the parts that make up the whole
In determining the finer details of the conditions set out by the legislation, it is important to appreciate that a product may incorporate dozens, or even hundreds, of components. For example, if a car has a single patent covering one of its parts, then the entire profits generated by the sale of that car can qualify for patent box relief. Not only that, but any parts sold by the car manufacturer will also fall within the patent box regime, even if the component itself has no patent protection.

Bearing this in mind, to ensure as many profits as possible qualify for the tax relief, it may be appropriate for clients to seek patent protection for as many products as possible.

Royalties can bring reward
It's often not appreciated that the benefits of patent box apply to companies involved in R&D that aren't patent owners themselves. For example, companies that license a patented invention from the patent owner on an exclusive basis can, in theory, apply the tax relief to the profits they generate as a result.

So if a client is already selling patented products and undertaking development work in that field, it should ensure it is exclusively licensed to use that technology in order to benefit from patent box. In addition, even if the patent owner is based overseas, some accountants may not be aware that profits made by a UK-based distributor may also be eligible.

Shifting the strategic focus
Many accountants will be familiar with the rule of thumb often applied when seeking patent protection that the scope of a patent needs to be as wide as possible in order to maximise any chance of infringement by third parties. The forthcoming patent box legislation has triggered a complete re-think on this.

While it is true that a patent with a narrower scope of protection may leave the patent less likely to be infringed, the tighter the focus of the patent, the faster the application should be processed, with an associated reduction in the cost of obtaining the patent. In taking this approach, business owners could benefit from patent box earlier than they otherwise would.

A guiding hand
Accountants have an important role to play in guiding their clients and helping them to take full advantage of the patent box opportunity. Official guidance is limited but, with April 2013 fast approaching, they need to be armed and ready with appropriate advice.

Michael Jaeger is a patent attorney at Withers & Rogers

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