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International Clinical Trials

Inside the Box

In April 2013, the UK Government rolled out new legislation enabling companies to opt into a scheme in order to apply a lower rate of tax to profits derived from patented inventions and certain other medicinal or botanical innovations.

Through this ‘Patent Box’ regime, companies that have patented products – for example, new pharmaceutical products, medical devices or therapeutic delivery methods – can now reduce the corporation tax payable in relation to profits generated, from the main rate of 23 per cent currently applied in the UK to 10 per cent. This 13 per cent reduction represents potentially huge savings for pharmaceutical companies that derive the vast majority of their income from patented products.

The reduced tax rate available under the scheme is not automatically applied to the relevant profits of a company; the Patent Box regime is optional so, to benefit from the reduced tax rate, qualifying companies must opt into it. Various aspects of clinical research may qualify, including the commissioning of external research to develop a patented invention, such as trials of a substance by a clinical research organisation, and payments to clinical trial volunteers.

The Patent Box will be phased in over four financial years, and will apply to 60 per cent of the relevant profits in 2013, increasing to 100 per cent in 2017. As the legislation is so new, the full benefits of the regime will only become apparent once it is phased in fully.

Business Benefits

To benefit from the Patent Box, pharmaceutical companies must actively own – or exclusively license – and manage a product which is protected by a patent held at the UK Intellectual Property Office (IPO) or the European Patent Office (EPO).

A company would not be able to benefit from the legislation if it was party to a non-exclusive licence to the patented product, or passively owned the intellectual property (IP) and played no role in the decision-making or management processes relating to the patent. Other requirements must also be met, including the obvious one that the qualifying company must actually be a company registered in the UK and subject to corporation tax, rather than any other type of legal entity.

Companies based outside of the UK but which trade in the country may elect to be taxed by HM Revenue & Customs. If they meet the required qualification provisions and the patent for the relevant product is held by the IPO or EPO, the profits derived from worldwide sale of the patented product could benefit from the reduced rate of corporation tax.

Licensing Advantage

Businesses can also use the Patent Box legislation to reduce the corporation tax paid on profit derived from the licensing of the patented product. The licences must be exclusive, and at least country-wide to meet the legislative requirements. So, if pharmaceutical companies license the use of their product to be incorporated into another product, for example, it would be worth reviewing their licence portfolio to ensure the licences granted are in line with the requirements.

An additional advantage is that the licensee would be able to benefit from the reduced rate of corporation tax on the profits derived from the sale of their own product, which could mean they would be willing to pay a higher price for Patent Box compliant licences. This effectively means the pharmaceutical company would have increased their profit and decreased their tax.

Patent Review

Pharmaceutical companies are advised to review their IP portfolio to determine whether changes could be made to the way IP is managed, in order to gain the maximum benefits from the Patent Box regime. For instance, firms may consider obtaining a patent on smaller innovative components of a larger product manufactured by that business, so that the sales income derived from sales of the end product fall within the Patent Box.

Businesses might consider whether a patent application can be extended – as far as is possible within the rules of patent prosecution – to cover any item produced by a particular process or technology, so that all of the sales income attributable to the end product would be eligible.

If a UK corporation applies for, or has patents granted in, non-qualifying jurisdictions in relation to certain items, that company should also consider whether to obtain a patent on the same items in a qualifying jurisdiction, such as the UK, in order to qualify for Patent Box benefits for the worldwide sales income that arises from those items.

Dutch Comparison

Some comparison may be made to a similar scheme introduced by the Dutch government in 2007, which reduced the rate of tax from 25 per cent to 10 per cent on “intangible” patented or R&D products. However, this scheme proved to be fl awed and, in 2010, an alternative “Innovation Scheme” was introduced, which improved some of the shortcomings and further reduced the rate of tax on income related to patented or R&D products to five per cent.

The reduction in the rate of tax in the Netherlands is therefore larger than the reduction in the UK. Similarly, Belgium and Luxemburg both have reduced rates of tax at around 5.5 per cent. Conversely, Ireland’s rate is set at 12.5 per cent.

Another advantage of the Dutch scheme over its British counterpart is that it does not impose restrictions on which spatent office the patent is filed under. In addition, the tax saving can be applied to non-patented products that have an “R&D certificate”. As the Patent Box scheme becomes more widely used in the UK, we may experience some of the issues the Netherlands came up against. Hopefully, the legislation will then be developed and amended accordingly.

Problems and Misconceptions

There is a misconception from many businesses in the pharmaceutical sector that the UK Patent Box regime will not be applicable to them. However, as long as the specific protocol is followed, there is no reason why they should not take advantage as soon as possible.

The problem seems to be a lack of understanding of the breadth of the legislation and the potential savings that are available. I recently had a conversation with the Managing Director of a company that derives almost all of its income from sale of a patented product, who said he did not think the legislation would have an impact on his business. This assumption was incorrect and stems from a lack of understanding of how widely the tax saving could be applied. Saving 13 per cent on the corporation tax payable on profits that a company makes, whose sole trade is via sale of a patented product, would be a substantial sum.

Trial and Error


The issue seems to be that the legislation is new and has yet to be tried and tested. The more companies that opt into the scheme, the more the benefi ts will be seen and reported in practice, which will encourage still more companies to join.

Similarly, there is no case law or commentary on the drafting of legal documents, such as licences, while loopholes and snags with the scheme itself are yet to be experienced. At this stage, we are in a trial and error phase. Companies may steer clear of making changes until they are on more certain ground. However, there is arguably more to be gained than lost by opting into the scheme now. Increasing knowledge and awareness will be the key that allows the full benefi ts to become clear.

Commercial Sense


While it is still early days for this new regime, it is essential that companies are made aware of the tax relief available on the profi ts generated from exploiting patented inventions, and take time to consider opting into the Patent Box scheme in order to take advantage of the tax savings available.

Companies should assess their IP portfolio and, as long as the activities undertaken in order to qualify are commercially sound, revise or establish their IP strategy to ensure they qualify for this tax relief – it is essentially a large tax saving, after all.


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Rhian Osborne is a Director of commercial law firm, Greenaway Scott. She gained a BSc in Neuroscience before moving into a career in law. Rhian previously worked inhouse as a lawyer for a biotech company and now heads up Greenaway Scott’s healthcare and life sciences division, specialising in commercial contracts.


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