FAQs und Guides

Introduction to the UK Patent Box

What is the patent box?

The patent box is an opt-in scheme for obtaining a reduced rate of corporation tax on certain IP-derived profits in the UK. To be eligible you must be paying UK corporation tax for the relevant tax year. The scheme started in April 2013 and was updated in July 2016, and is an area of tax law that any intellectual property active company will want to watch.

The reduced rate of 10% applies to a proportion of profits obtained from using patent rights, or from the sale of products incorporating a patented invention or made by a patented process.

“The Government is committed to providing the most competitive corporate tax system in the G20, in order to support strong and sustainable growth. To achieve this, it will be critical to create an attractive regime for companies to develop and exploit intellectual property (IP) in the UK”.

Source: www.hm-treasury.gov.uk

What is a patent?

A patent is an agreement between an individual and the state. The state grants the individual his/her right to prevent anyone from exploiting his/her invention, usually for up to 20 years, and in return the state generally makes public the details of the patent application 18 months after it is filed.

It is important to remember that a patent is a negative right – it can be used to stop someone else, but does not on its own give the patent holder freedom to operate (as they may be infringing someone else’s patent!)

Patents can be applied for in virtually every area of technology, although there are some exceptions, such as business methods and mathematical methods.

However, the take home message is that if the invention is technical in nature, it has a chance of being patented.

In order for an invention to be patentable, it must be novel, involve an inventive step and be susceptible of industrial application:

  • ‘novel’ – means that the invention must not have been made available to the public by any means anywhere in the world before the patent application is filed;
  • ‘involve an inventive step’ – means that when compared to the most similar invention already known to the public, the technical differences between the new invention and the known invention would not be obvious to a technician working in the field;
  • ‘susceptible of industrial application’ – there are very few situations where an invention is not susceptible of industrial application.

Novelty is a key requirement and so one of the very first questions when discussing patent protection should be: “Has the invention been disclosed to the public?”

When considering inventive step, a good way of assessing when a new invention is obvious is to ask what a technician working in the field in question would have done when trying to solve the underlying problem that the invention solves. If the technician would have made the same modification as in the new invention, it is likely that the invention will be obvious. On the other hand, if the technician could have made the same modification, but could also have made a different modification, there is a good argument to say that it is not obvious.

Many inventors think that their invention is ‘obvious’; however, this is often not the case and is simply a result of them undervaluing their inventive input. We are more than happy to have initial consultations to discuss the prospects of obtaining patent protection for new inventions.

Typical timeframe to obtain a patent in the UK

The time frame and costs involved for obtaining a GB patent are favourable compared with those for other patent systems. Official fees at the UK Intellectual Property Office (UKIPO) are low. A possible time frame is outlined below:

Month 1: Drafting

Papers filed electronically/Filing with combined search and examination

Month 5: 1st examination report

Month 12-18: Grant

The major costs relate to the drafting of the application and handling any examination reports. However, it couldbe possible to obtain a GB patent in about 12-18 months for around £5,000. If this cost is offset against 20 years of the 10% corporation tax reduction, the benefit of pursuing patent protection is clear.

A granted GB patent can provide reduced corporation tax for up to 20 years. Initial patent costs should be measured against projected long term benefits.

Patent box patenting cost savings

The claims of a patent define the scope of protection afforded by the patent. In most cases is it desirable to have granted claims that are as broad as possible – narrow claims could be ‘worked around’ by a competitor by making minor variations to the product thus rendering the patent ineffective. Accordingly, much time is spent drafting a patent application with broad claims and lots of fall back positions. Further time is often spent arguing for this broad scope with the patent office.

With this in mind, patents have a reputation for being timely and expensive to draft, obtain and enforce. However, for the purposes of the patent box, it may be acceptable to have granted claims that are very specific so HMRC can see that the product being sold is clearly covered by the designated patent. The knock-on effect of this is that the claims could be narrowly focussed and examination accelerated.

Patent box authorities

To elect profits into the patent box, the product in question must be protected by a qualifying right, eg, a qualifying patent. Although the patent box is a UK initiative, the patent that is used need not be a GB patent; it is possible to use a European patent, or some other patent granted by a patent office having acceptable standards of examination. However, for those companies that do not routinely pursue patent protection, using a GB patent is likely to be the most cost effective route.

Are other IP rights included in the patent box?

It is important to note that other rights, such as supplementary protection certificates (SPCs) and medical data exclusivity can also be used to elect profits into the Patent Box. These other rights may be very important for pharmaceutical companies. We would be happy to answer specific questions about these.

Update to the patent box scheme

In early November 2014, the UK and Germany released a joint statement announcing an intention to end the original UK patent box scheme.

Germany argued that the preferential tax treatment of IP in the UK created inequality within Europe. Whilst the UK is not the only EU member to provide a patent box, it does potentially offer the largest tax relief at 10%, compared to 15% or higher from other states offering such schemes.

Among other things, the joint statement included a proposal to close the existing patent box scheme to new entrants as of June 2016. Those already making use of the original patent box are able to continue benefitting from it until June 2021, at which point it will be abolished.

For new applications to the scheme, the updated patent box scheme came into effect on 01 July 2016 and is very similar to the original, except that it uses the internationally recognised 'Nexus' approach to benefit calculations. The upshot of this approach is that it reduces the benefits ofthe patent box by an 'R&D fraction', which is based on the proportion of research and development incurred by the business (in-house or contracted to 3rd parties) as opposed to that outsourced to related parties (eg, other businesses in a group). Consequently this may require some businesses to restructure their R&D activities to recover similar benefits to those under the old scheme. Similarly, the R&D fraction discounts the proportion ofresearch and development represented by any acquired IP (eg, licensed in).There are also some changes to how R&D expenses are tracked and traced back to the IP right or covered product.

However, the basic principles governing what patented products, services and royalties can contribute to eligible income for the scheme remain essentially unchanged.

How we can work with accountancy teams

We can liaise with accountancy teams to provide advice to clients on this specific issue.

How we can help clients

We can help innovators with the identification of existing patents and applications, and of new inventions, which could make products and processes qualify for the Patent Box.

How to join the patent box scheme

Businesses with an existing IP portfolio should review what products and services are covered by their existing IP, to determine what income streams may be eligible for the patent box. We can help with this process if desired.

Those businesses that do not currently have a patent or patent application should consider building an IP review into their product development cycle now. This should look for problems solved, efficiencies found or new features that could be the subject of a patent. Factors to consider in identifying valuable IP include how relevant it is to your unique selling point(s), how difficult it is to work around to achieve similar effects, and how easy it is to detect in competitor products;although it's worth remembering that innovation can be highly specific to your own product rather than being generalised or ground-breaking to target yourcompetitors.

Consequently a patent application can be narrowly tailored to unique aspects of your own product, with a view to simplifying and expediting the patent grant procedure. This in turn will allow you to benefit from the patent box scheme more quickly.

Contact us for patent box advice

If you wish to investigate whether an existing patent, or a new patent application, could make income from a product or service eligible for the patent box, please contact Doug Ealey or a member of the D Young & Co patent group; and we can discuss how your business might benefit from the reduced tax of the patent box.