UK PATENT BOX TAX REGIME
AUTHOR: HOWARD VEARES
12 JULY 2013
Copyright © July 13 BDO LLP. All rights reserved.
PATENT BOX REGIME
Key facts
• Enacted in Finance Act 2012
• Applies to new and existing patents
• Effective for income ear...
PATENT BOX REGIME
Concept
Page 3
Total
Taxable
Profits
Patent
Income
Non-Patent Income RoutineReturn
Patent
Box
ProfitMark...
INTRODUCTION TO PATENTS
IPO definition (paraphrase s1 Patent Act 1977)
• Invention must – s1(1)PA1977
- Be new
- Include a...
THE BASICS OF THE NEW REGIME
Conditions and computation
Page 5
• Must be a ‘qualifying company’
• Computation of income in...
WHAT IS A QUALIFYING COMPANY?
• A company which holds relevant IP
- Qualifying IP rights, or
- Exclusive licence in respec...
WHAT IS A QUALIFYING COMPANY?
Development criteria
• Company creates or significantly contributes to the patented
inventio...
WHAT IS A QUALIFYING COMPANY?
Development criteria
„significant‟
• Determined in the light of all relevant circumstances
-...
WHAT IS A QUALIFYING COMPANY?
Development criteria
Timing
• Company may acquire a fully developed IP
• Company can still b...
WHAT IS A QUALIFYING COMPANY?
Active ownership test
• Automatically met where company itself meets development criteria
• ...
WHAT IS A QUALIFYING COMPANY?
Active ownership test
Management activities
• Maintain protection in a particular territory
...
WHAT IS A QUALIFYING COMPANY?
Active ownership test
Management activities
„significant‟
• Determined in the light of
- Res...
DETERMINATION OF PATENT BOX PROFITS
Three Stages
Stage 1: Identify qualifying income
Stage 2: Extract routine profit eleme...
DETERMINATION OF PATENT BOX PROFITS
Stage 1
Stage 1a: Identify total gross income of the trade of the company
Includes
- T...
DETERMINATION OF PATENT BOX PROFITS
Stage 1
Stage 1b: Identify proportion of „Relevant IP Income‟ as a percentage of
total...
DETERMINATION OF PATENT BOX PROFITS
Stage 1
Stage 1b: Identify proportion of “Relevant IP Income” as a percentage
of total...
DETERMINATION OF PATENT BOX PROFITS
Stage 1
Stage 1c: Split trading profits according to percentage of RIPI/total
gross in...
DETERMINATION OF PATENT BOX PROFITS
Stage 2
Stage 2: Remove routine return to determine Qualifying Residual
Profit (“QRP”)...
DETERMINATION OF PATENT BOX PROFITS
Stage 3
Stage 3: Remove marketing return to arrive at „Relevant IP Profits‟
Either
• S...
DETERMINATION OF PATENT BOX PROFITS
Stage 3
Stage 3: Remove marketing return to arrive at „Relevant IP Profits‟
• Deductio...
PATENT BOX REGIME
Other points
Patent pending
• May be a number of years between an application for a patent and when the ...
PATENT BOX REGIME
What this might mean for your organisation
• Straight forward concept but intricate rules means it can b...
Page 23
Example
Page 24
PATENT BOX – CORE TEAM
Tony Spillett
tony.spillett@bdo.co.uk
+44 (0)20 7893 3315
Howard Veares
howard.veares@bdo.c...
BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of
BDO Inte...
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Patent Box

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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.

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Patent Box

  1. 1. UK PATENT BOX TAX REGIME AUTHOR: HOWARD VEARES 12 JULY 2013 Copyright © July 13 BDO LLP. All rights reserved.
  2. 2. 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% Page 2
  3. 3. PATENT BOX REGIME Concept Page 3 Total Taxable Profits Patent Income Non-Patent Income RoutineReturn Patent Box ProfitMarketing Asset Return
  4. 4. INTRODUCTION TO PATENTS IPO 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. Page 4
  5. 5. THE BASICS OF THE NEW REGIME Conditions and computation Page 5 • Must be a ‘qualifying company’ • Computation of income in the box = three stage process
  6. 6. 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’ Page 6
  7. 7. 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 Page 7
  8. 8. 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 Page 8 not significant may be significant
  9. 9. 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. Page 9
  10. 10. 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 Page 10
  11. 11. 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 Page 11
  12. 12. 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. Page 12
  13. 13. DETERMINATION OF PATENT BOX PROFITS Three 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% Page 13
  14. 14. DETERMINATION OF PATENT BOX PROFITS Stage 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 Page 14
  15. 15. DETERMINATION OF PATENT BOX PROFITS Stage 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 Page 15
  16. 16. DETERMINATION OF PATENT BOX PROFITS Stage 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 Page 16
  17. 17. DETERMINATION OF PATENT BOX PROFITS Stage 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 Page 17
  18. 18. DETERMINATION OF PATENT BOX PROFITS Stage 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 Page 18
  19. 19. 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 Page 19
  20. 20. 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 Page 20
  21. 21. PATENT BOX REGIME Other 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 Page 21
  22. 22. PATENT BOX REGIME What 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 Page 22
  23. 23. Page 23 Example
  24. 24. Page 24 PATENT BOX – CORE TEAM Tony Spillett tony.spillett@bdo.co.uk +44 (0)20 7893 3315 Howard Veares howard.veares@bdo.co.uk +44 (0)20 7893 3224 Nick Drizen nick.drizen@bdo.co.uk +44 (0)20 7893 3469 Duncan Nott duncan.nott@bdo.co.uk +44 (0)20 7893 3389
  25. 25. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. Copyright ©2013 BDO LLP. All rights reserved. www.bdo.co.uk

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