patent box
DESCRIPTION
These are the slides for Howard Veares's presentation on the patent box. The presentation was delivered at a seminar on the patent box presented at the Liverpool embassy in London on 12 July. The seminar was chaired by Jane Lambert and the other speaker was Michael Sandys of Broudie Jackson Canter.TRANSCRIPT
UK PATENT BOX TAX REGIME
AUTHOR: HOWARD VEARES
12 JULY 2013
Copyright © 11 April 2023 BDO LLP. All rights reserved.
PATENT BOX REGIME Key facts
• Enacted in Finance Act 2012• Applies to new and existing patents• Effective for income earned from 1 April 2013• Taxes profits attributable to qualifying IP rights at 10%• 10% tax rate being phased in over five years (60%, 70%, 80%,
90%, 100%)Fiscal Year
Standard
CT rate
PB rate Tax Saving
2013 23% 16.7% 6.3%
2014 21% 14.3% 6.7%
2015 21% 12.5% 8.5%
2016 21% 11.1% 9.9%
2017 21% 10% 11%
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PATENT BOX REGIMEConcept
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TotalTaxable Profits
Patent Income
Non-Patent Income
Rou
tine R
etu
rn
Patent Box ProfitMarketing Asset
Return
INTRODUCTION TO PATENTSIPO definition (paraphrase s1 Patent Act 1977)
• Invention must – s1(1)PA1977
Be new
Include an inventive step
Be capable of being made or used in some kind of industry
• s1(2)PA 1977 states that things consisting of
- “a scheme, rule or method for performing a mental act, playing a game or doing business, or a program for a computer”
are not inventions for the purposes of the act.
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THE BASICS OF THE NEW REGIMEConditions and computation
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• Must be a ‘qualifying company’
• Computation of income in the box = three stage process
WHAT IS A QUALIFYING COMPANY?
• A company which holds relevant IP
Qualifying IP rights, or
Exclusive licence in respect of qualifying IP rights
• Qualifying IP right
Patent granted by UK or European Patent Office (plus certain other patent offices)
Must meet the ‘development criteria’
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WHAT IS A QUALIFYING COMPANY? Development criteria
• Company creates or significantly contributes to the patented invention, or
• Company performs a significant amount of activity to develop the patented innovation, any product incorporated into the patented invention, or any process incorporating the patented invention
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WHAT IS A QUALIFYING COMPANY? Development criteria
‘significant’
• Determined in the light of all relevant circumstances
Applying for patent in respect of acquired rights
Acquiring rights to and marketing a fully developed patent
Work to test or enhance the viability or usefulness of the idea
Developing a new application for an item
• Contribution could be significant by virtue or costs, time or effort incurred. Alternatively it could be significant due to value or impact of the contribution
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not significant
may be significant
WHAT IS A QUALIFYING COMPANY? Development criteria
Timing
• Company may acquire a fully developed IP
• Company can still benefit from regime if it undertook development activity before or after acquisition
• Example: Company A conducts a project to develop more efficient light bulb. Then discovers another company (B) already holds a patent on light source. Co A acquires the patent from Co B. Co A will meet the development criteria even though it took place before acquiring patent.
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WHAT IS A QUALIFYING COMPANY? Active ownership test
• Automatically met where company itself meets development criteria
• Regime allows development to be undertaken by any company in the same group
• Where development is undertaken by another company, patent owing company must meet ‘active ownership test’
• During the accounting period the company performs a significant amount of ‘management activity’ in relation to the right
• Involved in planning and decision making activities associated with developing or exploiting substantially all of its IP portfolio
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WHAT IS A QUALIFYING COMPANY? Active ownership test
Management activities
• Maintain protection in a particular territory• Grant licences• Research alternative applications for the innovation or licensing
others to do so
• Deciding on which products will go to market• What features those products will have• How and where they will be sold
All count as management activity
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WHAT IS A QUALIFYING COMPANY? Active ownership test
Management activities
‘significant’
• Determined in the light of Resources company employs
Breadth of its responsibilities for the IP
Nature of IP rights held and amount of management they require
The significance and impact of the decisions and plans it makes in relation to the IP
HMRC – normally it will be clear in practice whether the company’s activity is significant.
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DETERMINATION OF PATENT BOX PROFITSThree Stages
Stage 1: Identify qualifying income
Stage 2: Extract routine profit element (10% mark up on costs)
Stage 3: Extract ‘brand’ value to determine patent profits
REMAINING PATENT PROFITS SUBJECT TO TAX AT 10%
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DETERMINATION OF PATENT BOX PROFITSStage 1
Stage 1a: Identify total gross income of the trade of the company
Includes
- Trade income- Credits brought into account for tax on the realisation of intangible assets and
pre-2002 patent rights
Excludes
- Income streams from financial assets and lending activities
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DETERMINATION OF PATENT BOX PROFITSStage 1
Stage 1b: Identify proportion of ‘Relevant IP Income’ as a percentage of total trade income (from Step 1a)
Relevant IP Income
a) Actual income
1i) Income from the sale of qualifying items (ie, an item protected by a qualifying patent)
1ii) Income from the sale of items incorporating a qualifying patent
1iii) Income from the sale of items wholly or mainly designed to be incorporated into a qualifying item (eg, spare parts)
2. Licence fee or royalty fees for granting rights over qualifying IP or rights granted under an exclusive licence
3. Proceeds from realisation
4. Infringement income
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DETERMINATION OF PATENT BOX PROFITSStage 1
Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income (from Step 1a)
b) Deemed income
‘Notional royalty income’
• Company holds a relevant IP right• Total gross income of the company includes any income derived from things
done by the company that involve the exploitation by the company of that right, and
• That income is not itself relevant IP income or excluded income
Company can compute a notional royalty that is treated as Relevant IP Income
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DETERMINATION OF PATENT BOX PROFITSStage 1
Stage 1c: Split trading profits according to percentage of RIPI/total gross income
Prior to any apportionment
• Add back any R&D expenses • Strip out any loan relationship debits and credit
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DETERMINATION OF PATENT BOX PROFITSStage 2
Stage 2: Remove routine return to determine Qualifying Residual Profit (“QRP”)
• 10% mark up on certain costs
Capital allowances
Costs of premises
Personnel costs
Plant and machinery
Professional services
Utilities and transportation
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DETERMINATION OF PATENT BOX PROFITS Stage 3
Stage 3: Remove marketing return to arrive at ‘Relevant IP Profits’
Either • Small claims relief
Take 25% of QRP out as a deemed marketing return
Remaining 75% (up to a maximum of £1 million) is left in the patent box
Or• Compute an arms length royalty rate on the marketing assets –
‘notional marketing royalty’ (Amount A) Trade marks
Signs and indications or geographical origin of goods or services
Information about actual or potential customers
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DETERMINATION OF PATENT BOX PROFITS Stage 3
Stage 3: Remove marketing return to arrive at ‘Relevant IP Profits’
• Deduction any actual royalties paid in respect of the assets (Amount B)
If A – B < £nil (ie negative), no further adjustment is required
If A – B < 10% of QRP (stage 2 profits), no further adjustment required
Otherwise MAR = A - B
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PATENT BOX REGIMEOther points
Patent pending• May be a number of years between an application for a patent and when the
patent is actually granted (patent pending)• Legislation allows companies to claim an additional relief, in the year the patent
is granted, for any qualifying income and profit for up to six years prior to the grant of the patent
• Relief will be given at the effective rate applicable at the time the patent is granted
Revocation of patent • Patent attorneys tell us that up to 20% of all patents granted in some fields are
ultimately revoked. When revoked, treated as if it never existed.• HMRC have confirmed that where a patent is granted and then later revoked,
there will not be a recapture of relief already given but no further amounts can be claimed
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PATENT BOX REGIMEWhat this might mean for your organisation
• Straight forward concept but intricate rules means it can be tricky for FD/Tax managers to be able to easily quantify the potential benefits
• ‘The RealiZer’
Spreadsheet based tool designed to calculate potential benefits using actual data
A base case scenario modelled over a five year period
Capability to model alternative scenarios (steaming of expenses and different MAR)
Report summarising calculations, next steps and recommendations
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Example
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PATENT BOX – CORE TEAM
Tony [email protected]+44 (0)20 7893 3315
Howard [email protected] +44 (0)20 7893 3224
Nick Drizen [email protected] +44 (0)20 7893 3469
Duncan Nott [email protected] +44 (0)20 7893 3389
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