Intellectual property tax is currently getting a lot of attention on a global scale.  And arguably the UK is in the limelight with a number of tax efficient offerings, the most interesting of which is the UK Patent Box.  The UK Patent Box has been in the market for a little over a year and was brought in to stimulate innovation in the country. 

Basically, the Patent Box is a deduction from a company's taxable profits which have been generated as a result of a patent. It has the result of reducing the corporate tax on income generated from "qualifying intellectual property" to a rate of 10%.  It should be noted that patents already in existence prior to the legislation commencement on 1 April 2013 can also be included. 

Companies can claim the reduced rate if they have, what is deemed to be by HMRC, "qualifying intellectual property" which are owned or licensed patents.  The tax calculation is complicated, and there are conditions required to be met in order to avail of the regime (all of which is summarised in our eBook "The Entrepreneurs Guide to the UK Patent Box").

Ever since the UK Patent Box was announced, it has been surrounded by controversy.  There are a number of reasons as to why it has been labelled by other European countries as a "tax avoidance tool", which appears to promote "unfair [or] harmful tax competition" (at least according to Germany's finance minister). Firstly, by allowing prior patents in, it is criticised for not encouraging innovation.  Secondly the regime applies to product profits rather than profits only from the patent itself, thereby being excessively generous.  The third reason for it being deemed "harmful" by some is that a company may, in some situations, be able to acquire a company to avail of their  Patent Box and obtain tax relief.  The European Commission is currently investigating the matter and their report is due to be issued later this month.  Some amendments are anticipated, but the legislation, thankfully from the UK's point of view, is expected to remain broadly the same.  

There are around eight other countries that have similar legislation to the UK Patent Box which supports the expectation that the European Commission will not deem it as uncompetitive.  It is also growing in popularity in the market place as more UK companies are realising the benefits it could provide.  There is an expected shift in business to the UK from countries which don't offer such incentives.  US companies are also expected to ramp up operations in the UK in order to avail of this generous tax regime.  

Here are five points to consider when starting the process to elect into the UK Patent Box:

1) Elect into the regime with a letter to HMRC.  It would be advisable to clear your intention to avail of the Patent Box ahead of your tax return filing to avoid any doubt and to ensure your company qualifies.  Write a formal letter to HMRC clarifying your intention to avoid any unpleasant surprises later on in the process.

2) In terms of qualifying intellectual property from other countries, you must be cautious as only the patents awarded by the European Patent Convention, the UK Patent Office, and specific EEA countries qualify for the UK Patent Box regime.  There are countries in the EEA that award patents nationally but do not qualify for the UK Patent Box.

3) Ensure that electing to avail of the Patent Box makes sense for your company.  Once elected, it cannot be easily de-elected.  A situation where Patent Box may not work is in the case of a small company having losses with no expectation of profits in the future.  The cost of electing into the regime can be quite high as some advisors may charge a significant amount in order to claim the benefit.

4) Ensure your patent is as specific as possible.  The narrower the patent is the higher the level of "commercial rigour" it has and the easier it is to be accepted into the Patent Box regime.  There is a push towards this style of patenting in recent times as it also reduces risk of infringement and more easily meets the qualifying intellectual property requirements.

5) You should compile backup to prove that you are actively developing the intellectual property.  The legislation attempts to prevent companies buying into the Patent Box by including the "development condition" as a requirement to attaining approval to use the regime.  As mentioned earlier, this is an area that is under scrutiny.  In order to ensure your argument for inclusion into the regime is strong, you must prove that the company's employees "significantly contribute to the creation of qualifying intellectual property" and that the company continues to develop the intellectual property.  You may even want to obtain a technical report to support the claim.

Despite best efforts from neighbouring countries to have the UK Patent Box regime repealed, it looks like the Patent Box is here to stay, in one shape or other.  Whether it is for every patent-heavy business is debatable but its aim has been to promote innovation in the UK.  We can but wait and see whether the regime will achieve its purpose but in the meantime we believe any company which has a patent that might qualify should consider taking advantage of this generous tax regime.