UK Patent Box: patent claims – two missing lines in the claims could be £2 million lost in post-tax profits
Tips for patent drafters:-
- do include product-by-process claims
- do include claims to a machine for making things.
To see why, read more…
The UK has introduced a tax break for companies which do R&D in the UK, patent, and manage their patents out of the UK. This can reduce the rate of corporation tax to 10% (in the end) from over 20%.
There is a “wrinkle” in the tax regime when it comes to patents for methods or processes. For articles/products the relevant income to be assessed at the lower tax rate is based upon the value of sales of the product. One could be forgiven for thinking that since section 60(1)(c) of Patents Act 1977 specifically says that patents for processes automatically cover the products made directly from the process, the proceeds of the sale of such patented products would count as relevant income for the purposes of the lower tax rate. However, such logical thinking would be wrong. The guidance from HMRC is that the proceeds received from the sale of products made by a patented process do not count towards the relevant income unless the patent includes a product-by-process claim. If it does include a product-by-process claim, then the sale of such products counts as relevant income, to be taxed at the lower rate. If it does not include a product-by-process claim, then most of the proceeds need to be taxed at the higher rate, but a notional royalty has to be assessed, and that royalty used as the relevant income for the lower rate. Obviously, most royalties are far less than the sale price of an article.
It therefore appears as though it is now very important to persuade examiners to include product-by-process claims in a process patent. Of course, these claims are not well-liked by examiners at the UK and European patent offices. However, the potential benefit of including them is so great it could be that applicants will argue more vigorously to keep them. In the past, we have balanced the cost of arguing to retain such claims against the perceived future benefit of having them. With patent box, there is now a potential significant financial benefit of having product-by-process claims, which may be much more immediate and real. Therefore, applicants could (and should) fight harder for the retention of product-by-process claims.
The HMRC tax guidance is never held out as being logical or consistent. Another interesting “wrinkle” is that if a company with a process patent (with no product-by-process claim in it) sells a product made by the process then income from that cannot count towards their relevant income to be assessed at the lower tax rate. However, if one of their competitors sells the same product, and they are sued and have to pay an account of profits or damages or other compensation, then that money does count as relevant income. Oddly, they might be better off from a tax point of view if their competitors sell the same product!
Also, whilst there is no patent protection for articles made by a patented machine (without a claim to the article or a process claim), the lower tax patent box regime applies to revenue from the sale of the unpatented things made by the patented machine. We will be looking harder at patenting machines for making things, as well as the things themselves, and processes.
John Lawrence, Senior Partner, Barker Brettell LLP
