Tim Wilson, an associate at the Oxford office of Dehns patent and trademark attorneys dodges the ‘pasty tax’ to uncover some good news for innovative firms in this year’s Budget

One important aspect of this year’s Budget that was rather overlooked is the announcement that the ‘Patent Box’ will come into force next year.

This deserves more widespread attention from the business community, as it offers the potential for very substantial tax savings across a wide range of businesses, especially among engineering and manufacturing companies.

The curiously-named Patent Box is an initiative to encourage innovation amongst UK companies.

It allows eligible profits from the sales of products covered by a granted UK or European patent to be taxed at only 10 per cent from April 2013 onwards (a substantial saving on the standard rate of 23 per cent).

So what is a patent? It is a document granted by the Government to a company or individual which empowers its owner to stop others from copying the invention for up to 20 years.

Patents are granted as a means of encouraging and rewarding the development of new products and services.

Any new idea or development which provides some technical advantage is potentially patentable.

Patents can be obtained across most areas of technology, including mechanical devices, electrical products, chemical compositions, medicines, tools, manufacturing methods, etc.

Contrary to popular belief, they are not just for high-tech multinationals and well-funded research labs but are frequently exploited by small and medium-sized companies, often at relatively modest cost.

While patent protection has always been a powerful means of maximising competitive advantage from a new product, the new Patent Box regime will allow more of the financial benefits from innovation to be retained by patent owners.

Countries such as the Netherlands and Belgium have operated similar systems for several years, and the Patent Box was first proposed in the UK more than two years ago.

It has since been warmly welcomed by many British companies. Chancellor George Osborne will no doubt have been particularly delighted by the recent confirmation from pharmaceuticals giant GlaxoSmithKline that it will be investing £500m in new jobs and manufacturing in the UK, as a consequence of the Patent Box's coming into force next year.

While the Finance Bill 2012, which includes the Patent Box provisions, has not yet been passed, there are not expected to be many changes to the Patent Box from the detailed proposals which have already been published.

The favourable tax rate will be available on worldwide profits arising from sales of items covered by a UK patent, or of products that incorporate patented items.

This includes products which are not themselves patented but which are sold with a patented item as a functional component — for example a printer sold with a patented ink cartridge.

Just one patent covering a relatively small technical feature may be enough for profits from sales of the entire product to be taxed at the reduced rate.

A company may also benefit from lower tax when it exploits a patent in other ways than simply selling patent-protected products.

For instance, if a company patents an innovative manufacturing process, it can claim tax relief on sales of the manufactured product.

There will also be tax relief available for royalty income when a patent is licensed exclusively to another company.

Also, the company buying the licence can also claim relief on its profits under the licence, so long as it further develops the patented technology in some way.

The Patent Box regime will be phased in gradually, starting with 60 per cent of the full benefit from April 2013 and increasing 10 per cent each year until it reaches full effect from April 2017 onwards.

The rules for calculating profits eligible for a reduced tax rate are complex and will require the involvement of a suitably experienced accountant.

Although there is some allowance for time spent in the application process, the Patent Box requires that a UK or European patent be granted before tax relief can start being claimed.

As it can typically take up to three years for a UK patent to grant, businesses should be looking at filing patent applications now in order to start benefiting from the Patent Box as early as possible.

The cost of obtaining a UK patent is typically a few thousand pounds, including patent attorney's fees.

But the tax savings resulting from the Patent Box may be several times this amount, quite apart from the value of the patent protection itself.

Contact: 01865 305100 Web: www.dehns.com