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Taxation of Patents

The main intellectual property rights under English law and how they are enforced.

Patents

  • Patent law in the UK is mainly governed by the Patents Act 1977. This provides protection for inventions by giving the patent holder (usually the inventor) the right to prevent others from using his ideas. Patents in the UK, and the European Economic Area (EEA), last for 20 years from their filing date. Patents are “intangible property rights” and can be sold.

A reduced rate of corporation tax of 10% from April 2013

  • The Patent Box allows companies to elect for a 10 % rate of corporation tax from 1 April 2013 to all profits attributable to qualifying patents, whether paid separately as royalties or embedded in the price of products. This calculation is effectively designed to exclude profits which derive from routine manufacturing or development functions from being taxed. Companies may decide whether to opt in to the regime, and when doing so must take into account the extra administrative burden that may be imposed, as well as the potential benefits.
  • In order to benefit from the scheme the company must actively own or in-license UK or EP patent (or other examined patents granted by EU national patent offices, yet to be named). Active ownership requires that the company must have developed the product covered by the patent, or for a licensee must have exclusive rights.

Tax when you sell a patent

  • Normally a UK resident is taxed on one-sixth of the sale price over six years, which normally starts when it sells the patent. Alternatively, the inventor (seller) may choose to have the whole capital sum taxed once the sale proceeds have been received.

Tax on profits when you sell a patent

  • If the seller is a non-UK resident company and the patent is granted under English law, the seller is still required to pay tax on the profits made, once the deductible costs have been taken into consideration. Deductible costs include any expenditure incurred by the company in connection with the sale. The chargeable amount will be charged when the company receives the sale proceeds.
  • If the sale proceeds are received by the company in instalments, the company is required to pay tax on each instalment up to a maximum of six years.

Corporation Deduction

  • Companies may claim relief from corporation tax for maintenance expenses.
  • The expenses you can deduct include expenses in connection with (a) the grant or maintenance of a patent, (b) the extension of the term of a patent, or (c) a rejected or abandoned applications for a patent.

Licensing a patent

A license is a contractual arrangement between the owner of a right, and someone who wishes to obtain the rights from the seller. The licensee of the patent then has the rights over the patent as set out in the licence agreement.

Tax paid by a Licensee

  • Licensees of a patent may deduct the royalty payments as a business expense.

Tax paid by Licensor

  • Because a licence of a patent is not considered a sale for tax purposes, the licensor will only be taxed on receipt of the royalty payments as a business receipt.

Top Tip

The first point that companies should consider is whether they meet the requirements of the Patent Box allowance in order to benefit from the 10% reduced tax rate.