The Patent Box: a Kat's perspective

Boxing cats ...
On Wednesday of last week Her Majesty's Revenue and Customs (HMRC) published a Guidance Note on how the United Kingdom's Patent Box scheme works in practice. The Patent Box enables companies to apply a lower rate of corporation tax to profits earned after 1 April 2013 from their patented inventions and certain other qualifying innovations.

For those of you out there who want a very brief Patent Box crash course:

1. Who?
A company can elect to benefit from the Patent Box if:
  • it is liable to corporation tax;
  • it makes a profit from exploiting qualifying IP;
  • it owns or exclusively licenses-in qualifying IP; and,
  • has undertaken qualifying development in relation to qualifying IP.
If the company is a member of a group, it may qualify if another company in the group has undertaken the qualifying development.

2. What IP is eligible?
A company can benefit from the Patent Box if it owns or exclusively licenses-in:
  • patents granted by the UK Intellectual Property Office;
  • inventions not granted a patent by the UK Intellectual Property Office solely on national security or other grounds (but otherwise valid);
  • patents granted by the European Patent Office;
  • patents granted by the following countries in the European Economic Area: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden [Merpel notes that France is not included and wonders whether this will continue post-Olympics and the ‘magic wheels’ cycling controversy]; or  
  • other rights specified by Treasury Order, such as plant varieties, data exclusivity and supplementary protection certificates.
If the company is a member of a group, it must have either carried out the development activity itself or be actively involved in the ongoing management of the qualifying IP.

3. What does 'exclusively license-in' mean?
If a company has a licence to use the qualifying IP of a third party, it may be able to benefit from the Patent Box if it has:
  • rights to develop and exploit the qualifying IP;
  • rights to bring infringement proceedings to defend the above rights (or be entitled to most of the damages awarded in successful proceedings relating to its rights);
  • one or more rights to the exclusion of all other persons (including the licensor); and,
  • exclusive rights throughout at least an entire national territory.
The exclusive licensing conditions are relaxed for groups of companies, recognising as it does that one company in the group may own a portfolio of qualifying IP whilst another company exploits them.

4. What is a qualifying development?
A company or another company in its group must also have undertaken qualifying development for the qualifying IP by making a significant contribution to either:
  • the creation or development of the qualifying IP; or
  • a product incorporating the qualifying IP.
The intention behind such a requirement is to prevent patent trolls from trolling.

5. What income can benefit from the Patent Box tax relief?
The relevant income must come from at least one of the following:
  • selling products implementing the qualifying IP (including sales of the patented product, products incorporating the patented invention and bespoke spare parts);
  • licensing out qualifying IP rights;
  • selling qualifying IP rights;
  • infringement income or,
  • damages, insurance or other compensation related to qualifying IP rights.
A company can also benefit from the Patent Box if it uses a manufacturing process that is patented or provides a service using a patented tool. However, in these circumstances, the company has to calculate a notional royalty.

6. How and when to claim?
A company must make an election to benefit from the reduced rate of corporation tax that applies to the Patent Box. This is done in the calculations accompanying the company tax return or separately in writing.

A company wishing to benefit from the Patent Box must make its election within two years after the end of the accounting period in which the relevant profits and income arose. This election continues until it is revoked.  If the election is revoked, a company cannot re-elect for another five years.

The full benefit of the regime will be phased in from 1 April 2013. The appropriate percentages for each financial year are:
  • 1 April 2013 to 31 March 2014: 60%
  • 1 April 2014 to 31 March 2015: 70%
  • 1 April 2015 to 31 March 2016: 80%
  • 1 April 2016 to 31 March 2017: 90%
  • from 1 April 2017: 100%
If applicable, a company has to apply the reduced 10% rate by subtracting an additional trading deduction from its corporation tax profits.

6. How to calculate?
The Guidance Note provides some examples which this Kat will not endeavour to reproduce here.  Needless to say, from what she can gather, the process involves two methods of calculation (standard and streaming) and up to seven discrete steps.  If that is not the most fun that one can have sitting down, there is also the opportunity to set off Patent Box losses if certain conditions are satisfied.

The IPKat wonders whether, if this is such a good idea, there shouldn't also be boxes for those IP rights that are thus far excluded. He quite fancies a Design Box ...

Merpel has heard a rumour that a physical Patent Box is a myth and that it refers to a tick-box on a Belgian tax return.  Can any readers confirm?
The Patent Box: a Kat's perspective The Patent Box: a Kat's perspective Reviewed by Catherine Lee on Monday, August 13, 2012 Rating: 5


  1. Greater detail can be found here

    Of particular interest is how this might affect patent drafting. If you want to preserve the patent box benefit and minimise the risk of the patent being revoked, does this mean patents of narrow scope will be more advantageous than patents of broad scope?

    The patent box will also complicate how licences are drafted to ensure a clean separation between patent box eligible and ineligible income streams.

    Oh what fun a "minor" change in law can cause.

  2. Of particular interest is how this might affect patent drafting. If you want to preserve the patent box benefit and minimise the risk of the patent being revoked, does this mean patents of narrow scope will be more advantageous than patents of broad scope?

    There's lots of scope for tactics.

    E.g. restrict your claims to a narrow scope which can be granted quickly so that you get the Patent Box benefit sooner. In parallel, file a divisional where you can take your time to argue for broader protection.

    Or ask for accelerated search and examination of narrow claims in the UKIPO, while arguing for broader claims in the EPO. Or vice versa.

  3. There seem to be advantages under Patent Box in having product claims. Does anyone know whether medical use claims (i.e. purpose limited product claims such as X for use in a method of treating Y) would be considered as 'product' claims for the purposes of Patent Box? It seems to me to be an important question.

  4. I remember seeing a patent once where the invention was a wall socket that could accept several different countries' plugs - just the job for a hotel with international guests so that they didn't need to bring adapters with them. After all the claims to the wall socket, there were a couple of extra claims lurking: A hotel room comprising a socket as claimed in claim ..., and A hotel comprising a room as claimed in claim ... I wondered if these were for people who would agree to pay a 5% royalty without reading it too closely...

  5. The advantage of product claims stems from the legislation's labyrinthine definition of "relevant IP income", from which the tax benefit is calculated. There are several heads of such "relevant IP income".

    Working your way through a cascading series of definitions, income arising from the sale of a qualifying patented "item" falls directly within one of these heads.

    However, if you have income which doesn't fall within one of the defined heads, but which still arises from exploitation of a qualifying patent, you have to calculate a notional royalty as a percentage of the income. So that will usually reduce the tax benefit. It seems this was intended to apply to patented manufacturing methods and to patented methods which are used in providing a service.

    Your question comes down to whether a claim for "product X for use in treatment of Y" is an "item", so as to get the maximum tax benefit without having to calculate a notional royalty. The legislation includes a definition which says that "item" includes any substance. And product X is clearly a substance. So the answer is yes.

    But what if you have one of the old-style Swiss claims: "Use of a substance X for the manufacture of a medicament for therapeutic application"? HMRC may say that's not an item per se, it's a manufacturing method, so go calculate a notional royalty.

    Or, what if your patent claims (say) a method of unlocking a mobile phone, comprising detecting the user swiping his finger across a touch screen in a certain manner? A method is not an item.

    In the second of these cases, at least, you may be able argue on the basis of the legislation's definition of "qualifying items". It's "items in respect of which a qualifying IP right ... has been granted." You could argue that the mobile phone is an item "in respect" of which the patent has been granted, since the patent does provide valuable protection for the phone. (Or in an ideal world, of course, your patent would also have claims for the phone itself, corresponding to the method claims).

  6. I once had a conversation with well-connected tax lawyers regarding the "patent box" in another European country. I noted that it seemed made-to-measure for the pharmaceutical industry.
    "Oh no!", they laughed," it wasn't written for them. It was written BY them!"

  7. Merpel has heard a rumour that a physical Patent Box is a myth and that it refers to a tick-box on a Belgian tax return. Can any readers confirm?

    Confirmed, I'm afraid. My lovely mental pictures of boxes capturing cash and only allowing small amounts out was dashed when I found out.

  8. The European Commission has now started a formal investigation of the UK Patent Box and 8 other similar schemes in other countries.


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