Patent Box

THE PATENT BOX

Benefits, Challenges & Financial Implications

© Copyright 2013. ClearViewIP Ltd. All Rights Reserved.

www.clearviewip.com

The UK Patent Box was brought into force on 1st April 2013

Over the next 5 years the Patent Box will progressively reduce

Corporation Tax to 10% on profits derived from patents worldwide

The UK Patent Box only applies to companies in the UK

WHAT IS THE PATENT BOX?


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HOW DOES THE PATENT BOX AFFECT MY DEPARTMENT?


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- To take advantage of the Patent Box, UK companies will need to ensure There is collaboration between:

IP Department

Finance Department

Sales & Marketing Department

R&D Department

INTELLECTUALPROPERTY

FINANCE DEPARTMENT

RESEARCH & DEVELOPMENT

SALES & MARKETING

PATENT BOX


FINANCE DEPARTMENT


SALES & MARKETING

PATENT BOX

• Review and optimise the filing strategy, including:

– Filing patents with a narrow scope, to reduce examination period

– Maintaining patents, which may have been abandoned, if they provide tax advantages

• Better understand the link between patents in the portfolio and products sold by the company

THE IP DEPARTMENT


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IP Department will need to:

THE FINANCE DEPARTMENT


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• Coordinate the Patent Box Project:

– Interacting with other company departments

– Ensuring finance & tax professionals can realise potential tax savings & calculate them accurately

Finance Department will need to:INTELLECTUAL

PROPERTYFINANCE

DEPARTMENT


SALES & MARKETING

PATENT BOX

SALES & MARKETING DEPARTMENT


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FINANCE DEPARTMENT


SALES & MARKETING

PATENT BOX • Consider a new element in pricing & presentation

mix:

Eg. It may be beneficial for a necessary patented component to be sold together with the main product, if the main product is not patented, to achieve tax relief for the whole package

Sales & Marketing Department will need to:

R&D DEPARTMENT


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FINANCE DEPARTMENT


SALES & MARKETING

PATENT BOX

R&D Department may want to:

• Develop patentable product features which previously may not have seemed appropriate

Entities subject to UK Corporation Tax can take advantage of the Patent Box when they:

HOLD EITHER FULL OWNERSHIP OF OR AN EXCLUSIVE LICENSE TO A QUALIFYING PATENT

(granted by UK, EPO or other European Patent Offices) which protects a product/service or process, a product component or spare parts)

HAVE SIGNIFICANTLY DEVELOPED, ACTIVELY MANAGED OR EXPLOITED THE PATENTED INVENTION

DERIVE PROFITS FROM:

WORLDWIDE SALES of patented products/services, of a component/spare parts or from use of a patented process

WORLDWIDE LICENCE FEES AND ROYALTIES from licensing or sublicensing qualifying patents NB. This can cover fees for other IP rights included in the same licensing agreement (e.g. know-how, trade mark)

INCOME FROM SALE of qualifying patents

COMPENSATION DUE TO INFRINGEMENT of qualifying patents

THEORETICAL ROYALTIES equal to what the company would have received if qualifying patents had been out-licensed where patented process or item is used internally

DO I MEET THE CRITERIA?


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Over a 5 year period, the Patent Box tax regime will halve the Corporation Tax

rate to 10% on profit derived from qualifying patented products or services

The chart shows how the decline in corporation rate will be staggered.

WHAT IS THE TAX SAVING?


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14%

• 2013/14

13%

• 2014/15

12%

• 2015/16

11%

• 2016/17

10%

• 2017/18

Adjust trading profit (see HMRC CTA10/S357CG) by adding R&D relief and appropriate debits and credits for loan and finance income

Allocate a proportion of company’s total UK taxable profits, before interest, to IP related income NB. A more complex method is to use income streaming to allocate expenditure between qualifying and non-qualifying income.

Remove routine profit to work out Qualifying Residual Profit: calculated as 10% of company’s expected revenue without IP (Routine Costs include staff, premises, plant & machinery, transportation, professional services N.B. Raw materials, goods for resale, expenditure qualifying for R&D tax credit not included)

Remove theoretical marketing royalty equal to royalty company would have paid 3 rd party to make use of brand and other marketing rights. SMEs can deduct 25% of patent profit as marketing royalty. When QRP exceeds £3 million, the return on marketing assets is calculated based on transfer pricing techniques.

HOW DO I CALCULATE THE TAX SAVING?


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STEP 1

STEP 2

STEP 3

STEP 4

The UK Patent Box is calculated using a four step formula:

10% RATE: Remaining profit constitutes patent profit used to calculate Patent Box deduction, bringing the effective corporate tax rate paid to 10%.

EXAMPLE: CALCULATION GUIDE IP Income Non-IP

Income TOTAL

Worldwide Turnover - £32,500,000 £17,500,000 £50,000,000

Taxable Profit - £7,000,000

1: Added R&D Tax Credit - £2,000,000

2: Attributed Taxable Profits Pro-Rata - £5,850,000 £3,150,000 £9,000,000

3: 10% Routine Profits Deducted from £8m costs (£520,000)

Qualifying Residual Profit - £5,330,000

4: Deducted Marketing Royalty

QPR > £3m, so calculate based on transfer pricing.

Assume £0.9m(£900,000)

Patent Profits - £4,430,000

Patent Box Tax DeductionIn 2017, the Patent Box Tax

Deduction will be half of the Patent Profits

(£2,215,000)

Reduced Taxable ProfitCalculate from Taxable Profit – Patent Box Tax

Deduction £4,785,000

Tax Payable 20% CT on Reduced Taxable Profit £957,000

Tax Saved (£7m x 20%) - £957,000 £443,000


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This example highlights how AnyCo Ltd would benefit from the Patent Box in 2017:

- The UK consumer electronics company has an annual worldwide turnover of £50m.

- AnyCo has a range of products protected by qualifying patents and which account for 65% of income.

- The remaining 35% comes from maintenance services provided to customers.

- Taxable profit is £7m. - Routine costs amount to £8m and are

proportionally distributed between IP and non-IP income.

- The company is already claiming £2m in R&D Tax Credits.

WHAT DO I NEED TO DO?


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• Identify potential gaps & develop strategy for products without patents (ie. filing, acquisition)

• Identify non-core patents with no product relevance which could be sold to cover other companies' products

• Build evidence of relevance to product revenue

• Review product pipeline and patent coverage

• Identify patents & licenses to consider (based on filing date & geography)

• Portfolio Categorisation: to identify patents used in products & their stage of development

• Internal Patent Landscape: to map patents to product areas

Patent Box Strategy

Patent Relevance Mapping

IP Audit

The Patent Box offers a very significant opportunity to reduce Corporation Tax but will require planning, preparation and cross-departmental project work.

Better strategic management of IP – IP Audit – Implementing on-going IP management process.

Reduced IP Management Costs– Patents may be identified which are not aligned to

business and don’t provide defensive or Patent Box benefits Monetize or abandon

WHAT OTHER BENEFITS ARE THERE?


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HOW CAN CLEARVIEWIP HELP?


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Uniquely placed to project manage a Patent Box initiative across company & alongside tax advisors

Significant experience in patent landscaping & patent-to-product mapping

Frequently work with companies to acquire or divest patents

Optimise your R&D programmes & IP Filing Strategy to take full advantage of the Patent Box

Founded in 2007

Intellectual Property Consultancy providing comprehensive range of services to high-tech markets

Proven international commercial experience

Help clients develop IP strategy, establish effective processes & realise value from their intellectual property

Unique blend of commercial and IP experience

Highly competitive track record of delivering value to businesses

Experience of working with FTSE and Fortune 500 companies, as well as smaller enterprises

Support a range of industry sectors including, but not exclusive to: telecoms, computing, silicon, medical devices, satellite, consumer electronics, automotive and manufacturing

Bespoke services inclusive of, but no limited to: investment due diligence, IP strategy, competitive intelligence, IP discovery and capture, patent landscaping, patent searching, IP acquisition, commercialisation and coaching.

ABOUT CLEARVIEWIP


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DISCLAIMERThis document is for marketing purposes only. The information contained in this document should not be considered as legal or tax advice. ClearViewIP is an IP Management Consultancy and not a law firm or tax

advisory consultancy.

For a free, confidential discussion on how ClearViewIP can help your company, or to find out more information about The Patent Box, please

contact:

Benoit Geurts – Senior Consultant

(: +44 (0) 845 690 1953

*: [email protected]

www.clearviewip.com

Date post:	22-Jan-2015
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