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Published in Japanese

Eikoku News Digest

September 2012

The Patent Box

• I’ve heard that my company may be able to save tax by using something called a “Patent Box”. Our products are innovative and stand out from our competitors’ products – can we use the Patent Box?

Patent Box rules are due to be phased in from next April and there may be savings available. It is not enough just to have innovative products; they must also be protected by a UK or European patent. Certain other forms of intellectual property, particularly related to agriculture and pharmaceuticals, also qualify, but trademarks and design rights do not. If you do meet the various criteria then relevant profits will effectively be tax at just 10%.

• That sounds promising. Our parent company patents our products in Japan. Will they qualify?

Well, firstly the Patent Box will only apply to patents granted by the UK or certain European patent offices. Secondly if the UK company does not hold the patent then it may still be able to benefit if it has a country-wide exclusive license to develop and exploit the invention. Thirdly the company must either meet the “development condition” or, if this is met by a fellow group company, the “active ownership condition”.

The development condition is that the company must have created, or significantly contributed to the creation of the invention. The active ownership condition is that the company must play an active role in managing the qualifying rights.

• Wow, I bet interpreting those rules is pretty fiddly! It’s probably worth consulting a specialist to gauge whether it might apply to us. Let’s assume we do qualify; how do you calculate the tax saving?

As you can imagine, this is also quite complex, but the basic idea is as follows. First the company identifies the portion of its total income that relates to the relevant IP (called Relevant IP Income, or “RIPI”). This means sales of patented products, of course, but also other income derived from the IP, such as license fees, royalties, disposal proceeds and settlements for infringements. Next it calculates the related trading profit, either by allocating specific expenses or apportioning the profit. Finally it reduces this profit by amounts deemed to be the “normal” return that a company should expect on certain expenses (personnel costs, premises costs, etc) and on its marketing assets (such as goodwill, trademarks and marketing databases). This adjusted profit figure, called Relevant IP Profit (RP) is the amount to which the reduced rate applies.

• OK, I think I follow the logic. The idea is to link the reduction in tax specifically to the patent, right? There must be loopholes, though. Can I, for example, sell a low-margin patented product together with a high-margin product that has no patent and claim the deduction for the whole bundle?

There are extensive, strict anti-abuse provisions, so any scheme aiming to gain a benefit that the rules are not designed for is likely to be very risky. The scheme aims to boost innovation in the UK, though, so it should be considered when deciding where to locate development and commercialisation operations. It may also be a reason to obtain patents in the UK and Europe protecting products that you would not otherwise protect.

Patents can be expensive to obtain, but that could be significant tax saving, so it may well be worth doing. Thank you. I think I will speak to my accountant about this!

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