Ip and Tax Relief

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Patent Box

An opportunity for UK companies

to pay less Corporation Tax

Summary

• The Patent Box proposals

• 'Can you get a patent for that?'

• Example scenarios

• Questions

Some recent headlines

Timetable

• Three consultations to date

• Part of Finance Bill 2012

• Due to come into effect 1 April 2013

• Caution- We are patent attorneys, notaccountants!

Patent Box - objectives

• Enhance attractiveness of UK tax system(e.g. vs The Netherlands)

• Encourage location and retention of scienceand technology jobs in the UK

• Encourage investment and growth in theUK technology sector

How much tax?

• Corporation tax is currently 26% , reducing to24%

• Option to elect to HMRC for a reduction in UKcorporation tax to 10%

• with tapered implementation:

(Trade-off to include existing granted patents)

Year 2013/4 2014/5 2015/6 2016/7

% 60 70 80 90

effective % 15.2 13.6 12.4 11.2

Which profits?

• Profits passing through a UK companywhich is paying Corporation tax.

• Profits relating to qualifying products orservices covered by a relevant patent

• Worldwide sales

• Patent owner and exclusive licensee

Key message: the proposals are generous!

Which patent rights?

• UK patents

• EP patents

• Patents granted by some other countries

• Supplementary Protection Certificates(pharmaceuticals)

• Plant variety rights

• NOT US patents

Do all profits qualify?

• No - special calculation - less than 100% ofqualifying profits will be taxed at 10% rate

• HMRC fighting back!

• Deductions:– "routine return figure" - the profit a business might

make if it did not have access to patents

– "marketing assets return figure" - excludes profitsgenerated using established brandsKey message: number crunching by accountants!

Which profits?Key message: 10% rate

will not apply in practice!

What types of income qualifies?

• Sales revenue

• Royalties and other licence revenue

• Court awards from infringementproceedings

• Patent owners & exclusive licensees

– i.e., if a patent is licensed then both thelicensor's royalties and the licensee's sales canbe taxed at the reduced rate

Other requirements• Opt-in

- forewarning to HMRC

• Active ownership

– only applies to group companies

– defined as performing a significantmanagement activity

– a renewal decision counts as managementactivity

Which products? 1

Which products? 2

• Any product!

• "Complex products" including one patentedcomponent

• Any spares for the product, even if thespares themselves are not patented

Key message: for single product SMEs, all profitswill be relevant for only a single patent

What about processes?

What about services?• Unlikely to apply to entire sales revenue

• Companies which use their patents toperform processes or provide services canbenefit up to the level of an arm's lengthroyalty

Key message 1: service companies can benefit!

Key message 2: the more patents, the better!

Can I get tax relief whilst mypatent application is pending?

• Yes, but relief will be claimable only afterthe patent is granted (up to 6 years)

• Accelerate granting of the patent

Key message: to benefit ASAP, patent must be grantedbefore April 2014, therefore clients should act now

Who will benefit?

• Start-ups - a target of the proposals!• Research and manufacturing businesses• Local subsidiaries of multinationals with "active

management" in the UK , and profits washingthrough a UK company

• Existing patent holders get a windfall!

Further information:

• Withers & Rogers website - click on "Patent Box Services"button on the home page for detailed Q&A.Legislation:

http://www.publications.parliament.uk/pa/bills/cbill/2010-2012/0325/2012325.pdf

• "Technical Note":http://www.hmrc.gov.uk/budget-updates/march2012/patent-box-tech-note.pdf

• "Consultation on the Patent Box":http://www.hm-treasury.gov.uk/consult_patent_box_stage2.htm

• HMRC HM Revenue presentation:http://www.hm-treasury.gov.uk/d/patent_box_presentation120112.pdf

"Can you get a patent for that?"

What are patents?

State

Publication ofinventionstimulatesinnovation

Patentee

20 year monopoly

A tolerated monopoly

Types of IP

Intellectualproperty

Registered

Common Law

TRADE MARKS

Patents

Utility models

INVENTIONS

AESTHETICCREATIONS

RegisteredDesignsDesign

Right

Copyright

Databaserights

Know How

Patentability

• Novel - key test

• Inventive

• Sufficiently described

• Not excluded

Novelty & inventive step

• An invention is new if it is not part of thestate of the art.

• “State of the art”: everything available tothe public before filing date of the patentapplication.

• An invention is inventive if it is notobvious to a skilled technician.

• The hurdle is not as high as mostengineers think!

Not Patentable?

The most commonly encountered exceptions:

• Mathematical methods;

• Methods for doing business; and,

• Programs for computers, as such.

Exclusions are narrow so don't assume !

Check with a patent attorney

Patent claims

Product

Process

Apparatus

System

Chemical

Method

Use

Manufacture

Control

Pharma

Mechanical

Electronic

Control

Some examplesElectronics

antenna, processors, signal processing, image processing,apps, operating systems, electronic tags, etc.

Mechanicalplastic bags, shoes, golf clubs, hinges, tyre treads, coathangers, gearboxes, packaging, lids, corkscrews, etc.

Chemicalpharmaceuticals, methods of chemical synthesis, glues,dog biscuits, food products, paints, cleaning products,nappies, etc.

How do we get patents?

• Timescale to grant is usually 2 to 5 years in the UK.• This can be accelerated for (i) green patents, and (ii) with a

reason: "potential infringer" / "secure an investor".• UKIPO have confirmed that patent box alone is not enough!• Acceleration can result in a granted patent in 12 months or

less.

File PatentApplication

SearchStage

ExaminationStage

PatentGrant

A way forward?• File patent applications of 'narrow' scope and

more succinct description.

• Reduces potential for the patent to be usedcommercially, but...

... substantially increases the prospects of patentgrant (and may also reduce the overall patentingcosts).

Key message: low patent costs

• Budget cost for obtaining a narrow UKpatent will be around £5000.

A way forward?

Strategy - reasons for patenting

1. To protect your market.

2. To gain licence income.

3. To obtain a negotiating tool.

4. To maximise asset value.

5. TO OBTAIN TAX RELIEF.

"We don't need a UK patent"

• Traditional view taken by many businesses

• But Patent Box system now provides acompelling incentive

Key message: patenting costs canbe dwarfed by the tax benefit

A usual strategy

time (months)

0 12 30 60

UK

International(PCT)

USA

EP

CN

AU

gra

nt?

A modified strategy

time (months)

0 12 30 60

UK

International(PCT)

USA

EP

CN

AU

gra

nt?

grant?

Key message: modify your strategy!

Patents - summary

• File patent application before invention is disclosed.

• Relatively minor improvements are often patentable.

• It is now worth seeking to protect relatively minordevelopments to qualify for the Patent Box.

• Review of upcoming projects to determine suitability forpatenting.

• Consider tax relief in project costing.

• Conduct a Patent Audit - we can help!

Conclusions• This is a great opportunity

• Tax avoidance with official approval!

• Patenting should be cost negative

• This is already changing our clients'patenting strategy

• Act as soon as possible! (at least arrange anaudit)

Key questions for you

• Do you have patents for your products andprocesses?

• Are your unpatented processes secret?

• Will you be launching any new products?If so, should you seek patent protection?

• Distributors - are you selling patentedproducts?

Key questions for your accountant

• What do you know about patent box?

• Do you know relief commences in 2013?

• Have you the knowledge to make a claim?

• I have a patent, how should I arrange myrecords to best claim relief ?

• Does this affect my other tax strategies?

• Should I speak to a specialist tax adviser?

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