Patent Box. Using Patents to Reduce Tax Rates

UK and European patents provide legal protection for products, but from 2013 they may also provide a reduction in corporation tax on worldwide profits from those products.

In April 2013, the UK government introduced the ‘Patent Box’. This scheme allows companies who pay UK corporation tax to reduce the rate paid from current rates in excess of 20% to 10% on profits derived from products and processes covered by a granted UK or European patent, or a patent granted by certain EEA countries. Although the regime requires that a granted patent exists, profits earned in the six years before the patent was granted can be taken into account.

The calculation of how much profit is taxed at 10% requires that a “relevant intellectual property profit” be determined and companies should ensure that their accountant, or finance department, is aware of the new scheme. Here we explain several ‘patent
dependent’ factors to enable companies to get into the box in the first place.

Getting into the box

Companies will typically fall into one or more of the situations below:

“I have granted patents that I believe cover my products and activities”.

A check should be made as to the countries in which the patents are granted, and that the companies’ products and activities are actually covered by the claims of those patents. The patent box can incorporate income derived from sales and activities outside of the UK, and from royalties from patent licences. Consideration can therefore be given to “repatriating income” to make sure it is subject to UK corporation tax.

“Some of the products I have in development are not covered by patents”.

A new UK or European patent application could be filed for products that have not yet been made publically available. This application could be filed purposefully for the patent box by being narrowly focussed to increase the chance of a fast grant. The level of ‘inventiveness’ required to obtain a granted patent does not have to be ground breaking.

“I have patent applications, but no granted patents”:

If a company has only non-UK/European applications covering its products then, in certain circumstances, an equivalent UK or European patent application may still be filed. Currently pending UK/European applications may be narrowly focussed to facilitate faster grant, or a ‘divisional’ application may be filed from the current application to do the same whilst the original application continues to seek the broadest protection.