World Intellectual Property Organization

UK's growth agenda includes tax relief for innovation and IP

September 2012

by Ian Williams, Chairman, Campbell Dallas LLP, Scotland


Ian Williams has over 25 years' experience
in the energy sector, working with renewable
energy businesses and advising global oil
service companies on their UK and international
operations. He is Chairman of Campbell Dallas
LLP, one of Scotland's leading independent
chartered accountants with cross-cultural oil
industry expertise and a strong presence in the
renewable energy industry.
(Photo: Campbell Dallas LLP)

As part of its 2012 budget announcement, the UK government stated it would introduce a new corporation tax rate for companies that generate profit from a product they have actively developed and patented. This preferential tax regime known as Patent Box will come into effect on April 1, 2013. What are the benefits of this new tax regime, and what could it mean for the UK economy?

Historically, the UK has had an unsympathetic tax system in terms of research and development (R&D) with tax relief offered on capital expenditure rather than for company incentives to develop new technologies and processes. As a result, many companies registered their intellectual property (IP) in jurisdictions outside the UK to have the resulting income taxed at more favorable rates. For instance Ireland offers up to 25 percent tax relief on R&D revenue and capital expenditure and has a corporation tax rate of 12.5 percent for trading income derived from R&D.

In 2010, the UK government announced plans to invest over £200 million to create a network of Technology and Innovation Centres to stem this migration. The UK is home to less than one percent of the world's population, but its scientific community produces eight percent of the world's scientific papers, has a citation share of 12 percent (second only to the US) and over 80 Nobel prizes for scientific achievement. The introduction of these tax changes is a bold move by the government to motivate UK companies to utilize the talent that exists in the country and to further the work already being done.

The UK is in a prime position to maintain and build on its reputation as a market leader in R&D. The infrastructure needed is already in place, and these new government incentives should help convince companies to remain in the UK. Aberdeen, for example, with its thriving oil and gas industry stands to benefit greatly from Patent Box. Companies involved in meeting the many challenges of deepwater production in the North Sea are regularly developing new technologies.

The UK is the leading G8 industrialized country in research productivity, with 45 research papers per billion pounds of gross domestic product (GDP), compared to 25 in the US and 15 in Japan. It is also home to four of the world's top 10 universities.

The government's tax incentives will enable greater collaboration and increasing numbers of joint ventures between companies and universities, to push the UK's knowledge base a few more rungs up the innovation ladder.

In addition to a tangible increase in R&D activity is the possibility of additional monetary opportunities to fund it. With banks increasingly taking a step back from gap funding, there is a greater need for investment from private equity sources. Patent Box allows investors to see that, in addition to a tax relief on their initial investment, once a product or process is marketable, there will be a cash flow to repay them.


(Photo: iStockphoto / @ Yuriy Kirsanov)

From next April, companies in the UK will, in one year, effectively get tax relief to the tune of 225 percent, or £2.25 for every pound invested in patents. This is great news for global companies as they will be able to combine the internationalization of their operations with their intellectual property (IP) strategies. The benefit of these new tax structures can therefore extend well beyond the UK.

Currently the main rate of corporation tax in the UK is 24 percent. Patent Box will allow companies to apply for a rate of 10 percent on all profits attributable to qualifying patents, whether they are paid separately as royalties or embedded in the sales price of products. For companies selling patented products or licensing their patents, the calculation begins with the total profit derived from the sale of the patented product/process or with the licensing of the product/process.

Patent Box forms part of the government's growth agenda. The aim of the regime is to provide an additional incentive for companies to retain and commercialize existing patents and to develop new, innovative patented products. It is designed to encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of products patented in the UK, cementing the country's position as a world leader in patented technologies. It promises to further enhance the competitiveness of the UK tax system for high-tech companies that make a profit from patents.

Any patent is eligible as long as it has profit-generating potential and the company holds an exclusive right to license it. The new Patent Box incentive is open to any UK company that innovates and sells products stemming from work carried out within the UK, and that has patents initially commercialized after November 29, 2010. Companies will need to comply with certain conditions, however, before they can qualify for the new incentives.

The patent must have been granted by the UK's Intellectual Property Office under the Patent Act 1977 or recognized by the European Patent Office, and must have significant profit-generating potential. For example, a component that makes up part of another product, such as a handle on a drill, will not qualify for the scheme because it will not drive the profit of the product, even if the product is the first of its kind.

The scheme also specifies that the patented invention is to be developed in the UK. Should a company based outside the UK begin development of a patented product before taking it to the UK for completion, the company must re-register it in the UK. Also, in order to be eligible for the 10 percent corporation tax rate, the company must be actively involved in developing and exploiting the product – simply owning the patent right is not enough.

This new scheme will help make the UK's tax system one of the most competitive in the world. This is good news for companies already operating in the UK and an interesting business opportunity for newcomers.

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