How Patent Box Tax Relief Can Save Tax on a Deal

BLOG25th Sep 2014

By now, you may be aware that the new Patent Box Tax Relief (the “Relief”), introduced on 1 April 2013, can save your company tax on profits arising from eligible sales and licence income.

We’re presently in the transition period heading down to an effective 10% tax rate come 1 April 2017, but even in the current financial year the e1ective tax rate on relevant profits is 13.3%.

But were you aware that this Relief can also apply when you are selling your company’s trade and assets?

In summary, the Relief can apply where your company is selling eligible patents (broadly, those of the UK Patent Office, the European Patent O8ce [which have been subsequently validated in other countries] and certain other European countries), or exclusive licences of qualifying patents, and you fulfil the necessary other conditions (for example the development condition).

Are you selling a qualifying patent? Your advisors (both patent attorneys and tax) will be able to confirm this for you. You should note that only disposals of eligible patents or exclusive licences of eligible patents are within the Relief: if the same item/process has been protected in other non-qualifying countries then proceeds allocated to those other patents will not be eligible for the Relief.

Assuming that you are disposing of qualifying patents, you should agree with the purchaser which of the proceeds out of the total deal should be allocated to those patents and have this itemisation of proceeds noted on the sale document.

If your sale documentation does not itemise the consideration, you will have to allocate this on a just and reasonable basis between the qualifying and non-qualifying parts. What is just and reasonable will depend upon the circumstances of your case. For example, it might be appropriate, where you have income arising from both qualifying and non-qualifying patents covering the same item/process that you could base this allocation on historic income generated from the various countries covered by the patents. An alternative would be to have a valuation done by a third party valuer.

Even if you are planning to have an itemised consideration noted in your sale document, you should bear in mind that this should again be based on a just and reasonable allocation of the proceeds.

The above has been looking at the deal from the vendor’s point of view. If however you are the purchaser in a trade and assets deal, you could use the knowledge gained in the deal process that your vendor is eligible for the Relief as a bargaining tool in determining the price.

A final word of caution: if you want to claim the Relief then you have to elect into the Patent Box regime within two years of the end of your company’s accounting period in which you would wish to commence claiming the Relief.

These rules can be complex but the savings can be considerable. If your company holds eligible patents outright or licences them in, you should seek professional advice to establish how you can benefit.