1. The Patent Box Whats in it for me Richard Stanley – Tax Partner

2. ...The Patent Box is a key initiative to make the UK tax regime competitive for innovative high-tech companies… … in recent years, too many companies have been choosing to move their patents offshore… …The Patent Box will help to re-establish the UK as a top location of choice for innovative industries… …will encourage businesses across a wide range of sectors to invest in the UK, generating growth and creating jobs. David Gauke – Exchequer Secretary to the Treasury

3. Many types of Intellectual Property Goodwill Network Corporate Culture Employee Know-how Customer Contracts Supplier Relationships Legal Intellectual Property e.g. Patents, Trademarks, Copyrights Know-how e.g. Undivulged Technical Information Brand Image Confidential Concepts Internal Software Human Capital Work Papers

4. Overview of the Patent Box Government is striving to create the most competitive tax system in the G20 Corporation tax will be dropping to 23% by the end of this Parliament Aim of the Patent Box is to provide an incentive for companies in the UK to retain and profit from existing patents and encourage the development of new patent products.

5. Overview of the Patent Box Government focusing on patents because it is believed they have a strong link to high-tech R & D and manufacturing activity Does not cover copyright or trademarks It will seek to tax qualifying income and profits arising from patents at a rate of 10% Regime will apply from 1 April 2013

6. Why Patents? The majority of businesses hold some IP, and the government continues to believe that lower tax rates for all will usually be the fairest and most cost effective way to foster economic growth A general relief for IP would be expensive Patents have a strong link to scientific and high-tech R & D and to technological innovation activity Patents are readily identifiable, legally protected and subject to examination by an independent body before being granted

7. What are Patents? Monopoly right that lasts up to 20 years from the filing date of the patent Protects innovations that are new, not obvious and are industrially applicable Some exclusions – business methods, scientific theories and mathematical methods

8. What are Patents? Application made to the UK Intellectual Property Office (UKIPO) Description, claims, figures, abstract Can take up to 4 years or longer for patents to receive approval

9. What are Patents used for? A way of publishing information and preventing others from obtaining a patent Prevents others from using, selling, manufacturing or importing the invention Sell patent to third parties Funding initiatives (V.C.s) License to third parties to enable third party to use the invention

10. Extension to 20 year period Supplementary Protection Certificates Extension of up to 5 years to the term of patents in the field of pharmaceutical and agrochemical products Recognises the length of time it takes to obtain regulatory approval for these products

11. The Patent Box : overview Patent ownership Does the business hold a qualifying patent or patent rights? Qualifying income Does the business receive qualifying income related to the qualifying patent? Profit on income Residual profit Calculate total profits attributed to qualifying income Remove routine profit to calculate residual profit on qualifying income Patent profit Attribute residual profit to patent and non- patent IP to calculate patent box profit

12. Patent Box: which patents qualify? Patents granted by the UKs Intellectual Property Office (IPO) and the European Patents Office (EPO) Consideration being given to allow patents granted by the national patent offices of some other EU member states as long as that state operates a similar examination process before granting a patent Include supplementary protection certificates Regulatory data protection and plant variety rights Unlikely to include US patents

13. Patent Box: Patent ownership Companies with legal ownership An exclusive licensee of a patent (can be limited by field or territory) A company that has acquired the patent A company that has been involved in a partnership, joint venture or a cost sharing arrangement with the proprietor

14. The Patent Box: Qualifying income Broad scope of worldwide income from inventor covered by a current valid patent including: Patent royalties and other income from licensing Income embedded in patented products Income from the sale of patents Sale of a patent Sales of patented products Income attributable to patents used in industrial processes Damages arising from patent litigation Income arising while a patent is pending is included later once the patent is granted

15. How is the Patent Box profit calculated: Profit on income Residual profit Determine the total profit attributed to the qualifying income Remove the routine profit to calculate the residual profit on qualifying income Patent profit Determine what proportion of the residual profit is due to patents Formulaic three step approach based on residual profit split method

16. The Patent Box Profit: Step 1 Start from taxable trading profit Exclude: R & D tax credit enhancement Finance income and expenses Apportion remaining profit and expenses pro-rata on proportion of qualifying to total gross income Where pro-rata apportionment is inappropriate consider divisionalisation

17. The Patent Box Profit: Step 2 Calculate the routine and residual profit Routine profit - mark-up on tax deductible expenses 15% mark-up Exclude from the mark-up Outsourced costs Cost of materials and goods for resale Licence fees and royalties paid Remaining profit is residual profit

18. The Patent Box Profit: Step 3 Remove residual profit generated by other IP Multiply residual profit by ratio of R & D expenses to R & D plus marketing expenses Two other possible combinations Result = Patent Box profit Taxed at 10%

19. Patent Box losses! Patent box computations may give rise to patent box losses No compulsion to take into account in current year Carry forward against future Patent Box profits Possibly set against Patent Box profits in other group companies Can opt out of Patent Box regime at any time - cant then opt back in for 5 years after opting out

20. When will it all start? Consultation ceased on 2 September 2011 Draft legislation expected in Finance Bill 2012 Expected to be legislation in April 2013 Proposal is to include all existing patents rather than just new patents Phase in the benefit 2013/142014/152015/162016/172017/18 Proportion of full benefit available 60%70%80%90%100%

21. How does the UK Patent Box Compare? Patent Box already exists in a number of countries Netherlands – 5% Luxembourg – 5.72% Belgium – 6.8% Hungary – 9.5% France – 15.92% Malta – profit from patents is exempt from tax

22. What impact will the UK Patent Box have? Comments from the Institute of Fiscal Studies The patent box regime will do little to address market failures that discourage innovation. The patent box…will be expensive and will predominatently benefit a few large companies, Comments from Andrew Witty, CEO of GlaxoSmithKline The patent box is exactly the sort of active, long-term and creative support that we need from the government to ensure that the UK remains an attractive place for highly skilled sectors such as pharmaceuticals.

23. Thank you for listening

24. Richard Stanley 2 Lace Market Square Nottingham NG1 1PB Telephone: 0115 945 4300 E-mail: richard.stanley@smithcooper.co.uk