The Patent Box

The proposed 'Patent Box' provides a preferential tax rate for profits arising from patents. There are many ways in which a business can leverage its intellectual property rights to increase profits. A product which is protected by one or more patents will include features that competitors simply cannot offer, and can therefore be sold for a higher price. Alternatively, an invention might be licensed to other businesses, with a royalty being paid for each protected product sold. Patents can also be sold outright. Unfortunately, as it stands, corporation tax at the usual rate is currently applicable to these extra profits.

Politicians on all sides have long recognised the important contribution made by intellectual property rights to the UK economy. Indeed, around 8% of GDP is generated by industries supported by intellectual property. The UK's manufacturing industry is now dominated by companies producing high-value goods, some of them filing hundreds of patents each year.

It therefore comes as no surprise that the Government wants to encourage those who invest in the research and development which results in new inventions and better, more profitable products. Innovative businesses will be pleased to hear that the Government intends to do this by introducing a substantial reduction in corporation tax for profits derived from patented inventions. From April 2013, such profits will be taxed at only 10%, less than half of what most companies currently pay.

Profits qualifying for the special rate include royalties or licence fees collected from others, profits from products incorporating the invention, and even damages paid by infringers. Companies will be also able to claim retrospectively for profits up to four years before grant, whilst "patent pending".

Because a patented invention might form only a small part of a profitable product, the profits arising from the patented invention are likely to be rather difficult to calculate. Instead of attempting this complex and probably impossible task, the Treasury is proposing a formulaic approach, simply assuming a "routine" profit margin of 15% of the cost of making a product, and allowing any additional margin to be attributed to the technical advances protected by patents. Goods which can be sold with a higher profit margin because of value added by an attractive brand can therefore also benefit, as long as they are also protected by a valid patent.

The Patent Box provides yet another compelling reason to patent your invention. As well as protecting your invention from copyists, your tax bill may be substantially reduced by making sure that valid patents are in force covering your profitable products.

The Patent Box is not the only aspect of the Government's drive to reward innovation in the UK. Companies may also be entitled to claim tax relief on research and development expenditure. Obtaining a patent is now looking more attractive than ever to UK businesses.