This document summarizes the UK government's new "Patent Box" tax proposal, which allows companies to pay a lower 10% tax rate on profits associated with patents and certain other intellectual property. Key points include that the proposal aims to encourage innovation and job growth in science and technology in the UK. To qualify, a company must have active ownership of a UK or European patent and only a portion of qualifying profits will be taxed at the reduced rate after exclusions. The document provides examples and advice on maximizing the potential tax benefits through patent strategy.

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2. Patent Box
An opportunity for UK companies
to pay less Corporation Tax

3. Summary
• The Patent Box proposals
• 'Can you get a patent for that?'
• Example scenarios
• Questions

4. Some recent headlines

5. Timetable
• Three consultations to date
• Part of Finance Bill 2012
• Due to come into effect 1 April 2013
• Caution- We are patent attorneys, not
accountants!

6. Patent Box - objectives
• Enhance attractiveness of UK tax system
(e.g. vs The Netherlands)
• Encourage location and retention of science
and technology jobs in the UK
• Encourage investment and growth in the
UK technology sector

7. How much tax?
• Corporation tax is currently 26% , reducing to
24%
• Option to elect to HMRC for a reduction in UK
corporation tax to 10%
• with tapered implementation:
Year 2013/ 4 2014/ 5 2015/ 6 2016/ 7
% 60 70 80 90
effective % 15.2 13.6 12.4 11.2
(Trade-off to include existing granted patents)

8. Which profits?
• Profits passing through a UK company
which is paying Corporation tax.
• Profits relating to qualifying products or
services covered by a relevant patent
• Worldwide sales
• Patent owner and exclusive licensee
Key message: the proposals are generous!

9. Which patent rights?
• UK patents
• EP patents
• Patents granted by some other countries
• Supplementary Protection Certificates
(pharmaceuticals)
• Plant variety rights
• NOT US patents

10. Do all profits qualify?
• No - special calculation - less than 100% of
qualifying 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 profits
generated using established brands
Key message: number crunching by accountants!

11. Which profits?
Key message: 10% rate
will not apply in practice!

12. What types of income qualifies?
• Sales revenue
• Royalties and other licence revenue
• Court awards from infringement
proceedings
• Patent owners & exclusive licensees
– i.e., if a patent is licensed then both the
licensor's royalties and the licensee's sales can
be taxed at the reduced rate

13. Other requirements
• Opt-in
- forewarning to HMRC
• Active ownership
– only applies to group companies
– defined as performing a significant
management activity
– a renewal decision counts as management
activity

14. Which products? 1

15. Which products? 2
• Any product!
• "Complex products" including one patented
component
• Any spares for the product, even if the
spares themselves are not patented
Key message: for single product SMEs, all profits
will be relevant for only a single patent

16. What about processes?

17. What about services?
• Unlikely to apply to entire sales revenue
• Companies which use their patents to
perform processes or provide services can
benefit up to the level of an arm's length
royalty
Key message 1: service companies can benefit!
Key message 2: the more patents, the better!

18. Can I get tax relief whilst my
patent application is pending?
• Yes, but relief will be claimable only after
the patent is granted (up to 6 years)
• Accelerate granting of the patent
Key message: to benefit ASAP, patent must be granted
before April 2014, therefore clients should act now

19. 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 washing
through a UK company
• Existing patent holders get a windfall!

20. 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

21. "Can you get a patent for that?"

22. What are patents?
A tolerated monopoly
State Patentee
Publication of 20 year monopoly
invention
stimulates
innovation

24. Types of IP
TRADE MARKS INVENTIONS
Registered Patents
Common Law Utility models
Intellectual
property
Copyright Know How
Database Registered
Design Designs
rights AESTHETIC
Right
CREATIONS

25. Patentability
• Novel - key test
• Inventive
• Sufficiently described
• Not excluded

26. Novelty & inventive step
• An invention is new if it is not part of the
state of the art.
• “State of the art”: everything available to
the public before filing date of the patent
application.
• An invention is inventive if it is not
obvious to a skilled technician.
• The hurdle is not as high as most
engineers think!

27. 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

28. Patent claims
Mechanical
Apparatus Electronic
Product
System Control
Chemical
Manufacture
Method
Process Control
Use
Pharma

29. Some examples
Electronics
antenna, processors, signal processing, image processing,
apps, operating systems, electronic tags, etc.
Mechanical
plastic bags, shoes, golf clubs, hinges, tyre treads, coat
hangers, gearboxes, packaging, lids, corkscrews, etc.
Chemical
pharmaceuticals, methods of chemical synthesis, glues,
dog biscuits, food products, paints, cleaning products,
nappies, etc.

30. Some examples
Electronics
antenna, processors, signal processing, image processing,
apps, operating systems, electronic tags, etc.
Mechanical
plastic bags, shoes, golf clubs, hinges, tyre treads, coat
hangers, gearboxes, packaging, lids, corkscrews, etc.
Chemical
pharmaceuticals, methods of chemical synthesis, glues,
dog biscuits, food products, paints, cleaning products,
nappies, etc.

31. Some examples
Electronics
antenna, processors, signal processing, image processing,
apps, operating systems, electronic tags, etc.
Mechanical
plastic bags, shoes, golf clubs, hinges, tyre treads, coat
hangers, gearboxes, packaging, lids, corkscrews, etc.
Chemical
pharmaceuticals, methods of chemical synthesis, glues,
dog biscuits, food products, paints, cleaning products,
nappies, etc.

32. How do we get patents?
File Patent Search Examination Patent
Application Stage Stage Grant
• 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.

33. A way forward?
• File patent applications of 'narrow' scope and
more succinct description.
• Reduces potential for the patent to be used
commercially, but...
... substantially increases the prospects of patent
grant (and may also reduce the overall patenting
costs).
Key message: low patent costs

34. A way forward?
• Budget cost for obtaining a narrow UK
patent will be around £5000.

35. 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.

36. "We don't need a UK patent"
• Traditional view taken by many businesses
• But Patent Box system now provides a
compelling incentive
Key message: patenting costs can
be dwarfed by the tax benefit

37. A usual strategy
UK
USA
EP
grant?
International
(PCT)
CN
AU
0 12 30 60
time (months)

38. A modified strategy
UK grant?
USA
EP
grant?
International
(PCT)
CN
AU
0 12 30 60
time (months) Key message: modify your strategy!

39. Patents - summary
• File patent application before invention is disclosed.
• Relatively minor improvements are often patentable.
• It is now worth seeking to protect relatively minor
developments to qualify for the Patent Box.
• Review of upcoming projects to determine suitability for
patenting.
• Consider tax relief in project costing.
• Conduct a Patent Audit - we can help!

40. 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 an
audit)

41. Key questions for you
• Do you have patents for your products and
processes?
• Are your unpatented processes secret?
• Will you be launching any new products?
If so, should you seek patent protection?
• Distributors - are you selling patented
products?

42. 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 my
records to best claim relief ?
• Does this affect my other tax strategies?
• Should I speak to a specialist tax adviser?

43. Any questions?
Adrian Chettle
achettle@withersrogers.com
© 2012 Withers & Rogers

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