For those involved in the front line of new product development, maximising product appeal while reducing manufacturing costs is the route to increasing gross margins. However, corporate targets are set around net profit calculated after tax and other deductibles. A new HMRC initiative linking the use of patents with a reduction in UK Corporation Tax is set to get CEOs knocking on the door of the NPD team…
Lord Drayson, the entrepreneur and erstwhile Minister for Science, dreamed up a scheme to encourage the development and exploitation of IPR within the UK. Despite his departure from office following the election, the scheme has continued and will become active from April 2013. The initiative centres on reducing the effective rate of Corporation Tax, on qualifying income, from 23% to 10%. The politicians say this fiscal incentive is designed to ’maintain the UK’s position as a world leader in patented technology’. But for our clients, it means that you can increase profitability from patented products!
This is a big deal! The Government estimates that they will forgo up to £1B in tax revenue, making the programme as valuable as R&D tax credits (which you are already claiming, aren’t you?).
The broad scope of the scheme provides potential benefits regardless of how you use your patents. Worldwide income from patent derived royalties, sale of a patent, and products or services that are based on patented technology are all potentially covered by the new tax regime. The patent must be registered in certain jurisdictions, which naturally includes the UK.
HMRC has confirmed that development projects outsourced to Cambridge Design Partnership fall within the new regime, and we are working with clients to review on-going projects and explore all patent opportunities. Additionally, we provide a service to review IPR strategy to ensure that it is aligned with Patent Box. This includes for example, an assessment of existing product portfolios for opportunities to update and incorporate patented features and reappraising the value of latent IPR.
Are there any downsides? Well, the tax relief will be phased in over a number of years and there are a number qualifying tests that must be met. It’s a new initiative and depending on the complexity of your circumstances there are some, as yet, untested calculations to derive qualifying profits – so expect some initial confusion. Oh, and they came up with a naff name – Patent Box. Apparently you ‘enter’ the Patent Box when you have a qualifying patent and have income attributable to it, and presumably ‘exit’ when you don’t (but you can’t come back for five years!).
Needless to say, there is now a compelling reason to re-evaluate your patent strategy. The drivers for creating IPR now include favourable tax treatment as well as protecting your ideas from competitors. This creates interesting scenarios for technologists where the goals are not just protected functionality, but could now include patentable innovations designed to hook a tax break (HMRC anti-avoidance measures notwithstanding!). I recently attended a briefing on Patent Box run by the Intellectual Property Office, and apparently they are recruiting to meet the growing tide of patent registrations.
The legislation seeks to reward those who innovate and create differentiated products, which we at Cambridge Design Partnership applaud as this is our core business. However, the blanket approach also offers the canny innovator opportunities to exploit the tax regime in ways perhaps not envisaged by its architects. Either way, now is the time review your IPR strategy to ensure that you take full advantage of the tax breaks offered by Patent Box.
Please get in touch if you want to know more or discuss how we could help your business benefit from Patent Box (or other IP initiatives and issues).
David Lewis can be contacted on 01223 264428 or [email protected]
http://www.cambridge-design.co.uk/blog/patentbox/
_______________________________________________________