The UK patent box tax regime provides a 10% corporate tax rate on profits attributable to patents and other qualifying intellectual property. The regime is being phased in over 5 years, starting at a 16.7% tax rate in 2013 and decreasing to the final 10% rate by 2017. To qualify for the patent box, a company must hold patents or exclusive licenses and meet development criteria or active ownership tests. Patent box profits are calculated in 3 stages - identifying qualifying IP income, extracting a routine profit amount, and removing an amount related to marketing assets. The regime provides tax benefits for UK companies developing and exploiting their patent portfolios.

1. UK PATENT BOX TAX REGIME
AUTHOR: HOWARD VEARES
12 JULY 2013
Copyright © July 13 BDO LLP. All rights reserved.

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%
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3. PATENT BOX REGIME
Concept
Page 3
Total
Taxable
Profits
Patent
Income
Non-Patent Income RoutineReturn
Patent
Box
ProfitMarketing Asset Return

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.
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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. 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’
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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
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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
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not significant
may be significant

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.
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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
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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
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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.
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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%
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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
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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
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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
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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
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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
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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
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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
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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
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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
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23. Page 23
Example

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

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