THE FINANCE BILL contains provisions concerning “profits arising from exploitation of patents etc.” – the so-called “Patent Box”.
The core of the Patent Box is: where a company owns or exclusively licenses at least one qualifying right where a special 10% corporation tax rate will apply to certain income [“patent income”] from products or processes, including income from countries where no qualifying right exists provided the company has been involved in the development of the product or process and actively controls decisions relating to exploitation of that product or process.
Calculating the amount that qualifies for the Patent Box rate of corporation tax is fiendish and definitely the accountant’s prerogative.
For an individual company, ownership of a Patent Box is relatively straightforward to determine; and normally any licences explicitly indicate whether they are exclusive or not. However, exclusivity or otherwise of licences within groups may be more complex. For example, for groups of companies, intellectual property (IP) holdings may be distributed among the group with or without internal licences to operating companies.
Although it appears informal, intergroup licences may qualify, it will be more certain the qualification test is met if formal licences are executed. There can also be advantages to recording licences, since this can materially affect the amount of damages that can be recovered in the event of infringement. Accountants and patent attorneys will need to get a clear understanding of their client’s business structure to ensure appropriate licences are put in place and recorded.
Although the Patent Box covers patents it also covers some rarer, but not less valuable, types of intellectual property such as regulatory data, and plant varieties.
Qualifying rights include UK patents, European patents whether or not validated in the UK, and patents issued from certain European economic area countries that work to a similar standard as the UK. For companies that choose only to patent in the USA – tough: they will not meet the Patent Box criteria.
To claim the Patent Box benefit, the qualifying right has to be granted, although the legislation allows a company to claim additional relief, in the accounting period in which a patent is granted, in order to recognise any qualifying income from exploiting the patented invention after application for the patent, for up to six years prior to the grant of the patent.
Accountants and patent attorneys will need to communicate to ensure accountants understand when relevant patents are granted. Also, patent attorneys will need to be informed by companies of their business plans, so if possible they can seek acceleration of a grant of relevant intellectual property rights to enable earlier claims of the Patent Box benefit.
The Patent Box proposals cover income that falls under relevant intellectual property income (RIPI) such as:
• Income from sale of items in respect of which a qualifying IP right held by the company has been granted (“qualifying items”);
• Income from sale of items incorporating one or more qualifying items;
• Income from sale of items that are wholly or mainly designed to be incorporated into qualifying items such as spare parts such as cartridges;
• Licence fees or royalties in respect of qualifying IP;
• Proceeds of sale of IP;
• Damages for infringement;
• Other compensation such as insurance.
Income from processes is considered as “IP-derived income” and is dealt with by way of a notional royalty calculation. It should be noted even if there is only one granted patent [e.g. a UK patent] the income can be attributed to the Patent Box as worldwide income. This makes filing a UK patent a far more attractive proposition.
To try to get the maximum relevant intellectual property income, patent attorneys will need to pursue claims to products wherever possible. To ensure any product claims cover the biggest income stream, it is vital the patent attorney is kept advised of the intended business model. A patent that covers a radio transmitter is useful, but if most of the income is in the receiver, not much relevant intellectual property income will be generated.
Since determining whether the benefit applies depends upon whether the product or process is covered by a qualifying patent, and as products may vary with time, companies may need to institute a regular IP audit with a view to checking whether new or modified products fall inside or outside the Patent Box. This will require input from patent attorneys, who will need to go beyond the normal assessment of infringement, and take on the different mind-set required to look to whether the relevant income qualifies.
One of the aims of the Patent Box is to encourage development by UK businesses. As such there is a requirement the company claiming the benefit has at any time made a significant contribution to the creation or development of the invention covered by the patent, or to developing products or processes incorporating the invention. These criteria can be met by other members in a group of companies. If a company joins or departs a group there is a requirement that development continues during the 12 months following its joining or departure from the group.
Care will be needed in acquiring or disposing of companies to ensure they do not lose any relevant Patent Box rights through failure to meet the development or active ownership criteria, with due diligence investigations needed by accountants and attorneys.
For the attorney, the Patent Box generally requires them to ensure claims cover the highest value items; ensure the country coverage is appropriate; advise on licensing and ownership issues. However, new responsibilities will arise such as assessing whether income streams represent relevant intellectual property income and considering Patent Box issues as part of overall IP strategy. There will also be a greater need for collaboration and communication with accountants.
Whether or not the Patent Box is attractive enough to achieve the government’s aim of promoting development, it will promote new professional challenges for patent attorneys and accountants alike.
Jim Boff, is a partner at law firm Phillips & Leigh
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