The Patent Box aims to stimulate UK innovation

The last couple of years have seen a rapid escalation in the number of patent disputes in the telecoms sector, prompting many big names to call for changes to software patent law to better allow the industry to break out profits derived from patents.

On Friday, the UK Government will close its consultation on the Patent Box draft legislation due to come into force on April 1 2013. The legislation aims to reduce corporation tax from 26 per cent to ten per cent for profits made on patented technologies. By offering this tax break, the aim is to increase high-tech manufacturing innovation in the UK and to encourage more telecom companies to set up on UK shores and increase investment.

Yet with the implementation of the legislation only a year away, if companies are to benefit from the reduced rates of corporation tax on patent profits, they need to understand which patents are owned – an arduous process that needs to be started now, according to legal experts in the field.

Jeremy Morton, patent lawyer and partner at CMS Cameron McKenna LLP, said the development should mean that some smaller businesses should now take a greater interest in filing patents, while others will want to review their established R&D, patent management and transfer pricing arrangements so as to make best use of available tax regimes internationally.

“What all this means is that patent battles are not just seen in court but also in the auction house. Old-school technology businesses like Kodak are seeking to pay off debt by offloading under-exploited patents that could have strategic value to others as bargaining chips,” Morton said.

Read the opinion piece from Jeremy Morton

“Patent Box will allow companies to apply the reduced tax rate to relevant profits from the sale or licensing of patents, the sale of products that owe value to patents, and compensation won in patent litigation. The regime is generous when it comes to products, because there need only be one European or UK patent underlying the product in order to be able to include the whole of the income from the product as the starting point for the calculations.”

Yet while this is a potentially attractive new regime, it has not been developed with the telecoms sector particularly in mind, so to take best advantage companies will need to review not only their tax and transfer pricing arrangements, but also the terms of joint ventures, licensing arrangements, business disposals and acquisitions, and plans for group reorganisations.

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