Jack Ellis

Next month, the ‘Patent Box’ tax regime will come into effect in the United Kingdom. From 1st April, companies will be able to apply a lower 10% rate of corporation tax to worldwide profits arising from patents rather than the full 23%. As well as encouraging businesses to more actively seek IP protection for their inventions, it is hoped that the tax break will incentivise patentees to invest the money they save back into R&D and further IP filings.

Paul Smith, partner at Blick Rothenburg, explains that the scheme is potentially much wider in its scope than similar ones in other countries. “This is because the UK rules apply not only to royalties and licence fees from the licensing of such rights but also to, for example, the sale of goods incorporating items that have been patented, and to sales of goods produced using machinery that incorporates patented parts,” he says. Therefore, the tax break will be available on profits attributable to a whole product incorporating a patented technology, rather than just the patented component by itself.

However, critics of the Patent Box, including the UK Institute of Fiscal Studies, suggest that the main beneficiaries of the scheme will be a small number of large companies – many based outside the UK – that already file the most patent applications and which build and market products integrating multiple patented technologies. The advantage to start-ups, which are likely to own just a handful of patents (if any) and typically do not make a profit in their first few years of existence, is less clear.

Furthermore, the Patent Box benefit can be sought on patent assets that have been obtained as part of a whole company acquisition – though not those bought in patent-only deals – and can even be claimed by exclusive licensees. This has raised concerns that companies may be able to enjoy the benefits of the scheme simply through acquiring a patent-owning business or a licence to another party’s patent without necessarily investing in UK-based R&D.

All that said, there are ‘qualifying development’ conditions that must be met by those applying for the tax break. “These are intended to limit the benefit of the Patent Box to companies and groups that have been involved in the innovation behind the patent or the application of the patented invention,” says Smith. This effectively rules patent-holding companies out of benefiting from the scheme. “There are also additional requirements to be met if a company that has undertaken the qualifying development joins or leaves a group after the development has been carried out,” Smith continues, referring to a situation where patents are gained as part of a corporate merger or acquisition: “In general, commercially motivated acquisitions can be made without denying the new group the benefits of the Patent Box where the company that has carried out the qualifying development continues to perform activities of the same description as those that constituted the qualifying development for a period of 12 months after the change of ownership.”

The Patent Box may well provide a powerful incentive for UK businesses to secure patents on their inventions. However, despite the UK government’s best intentions, a greater number of patents does not necessarily equate to a greater rate of innovation. China has also used tax breaks to persuade its companies to apply for more patents. It is no coincidence that the country’s State Intellectual Property Office (SIPO) last year surpassed the USPTO to become the world’s largest patent office in terms of the number of applications it handles – with much of its growth over the past few years accounted for by domestic filings. Both the Chinese government and the World Intellectual Property Organization have suggested that the SIPO’s ascendancy is indicative of an innovation explosion in the country. But the fact is that however high the annual number of patent applications and grants, quantity cannot tell us very much at all about the quality of those patents, their business value or the social and economic impact of the technologies they protect.

Clearly, we do not yet know how the UK Patent Box will work in practice – and whether it will actually provide an incentive for British businesses to invest more heavily in R&D. But putting the issue of innovation to one side, there are surely positives in any scheme that makes British companies – which by and large over recent years have a lamentable record when it comes to patents – consider IP as more than merely a legal expense. The financial benefits of the tax break are one thing – but the Patent Box could prove to be a watershed in the way in which UK companies think more generally about patents as strategic business assets; and that can only be good news.