Following a consultation and response last year, the Government has drafted legislation which would give companies the option of the “Patent Box”. This would mean profits from those qualifying patents would be taxed at 10% instead of the current rates of 20-27.5%.
The aim is to enhance tax competitiveness in the UK for companies which innovate, develop and exploit patents for profit. It is wide-reaching and all companies that sell patented products, receive royalties for patents, or utilise processes protected by patent for new and existing IP could benefit.
The “Qualifying Patents” would include patents granted by the UK IPO, European Patent Office, regulatory data protection, supplementary protection certificates (SPCs) and plant variety rights and companies will be able to claim the reduced tax for 6 years which covers the full patent pending period in the UK. A phased introduction of the Patent Box is planned from 1 April 2013, over a period of five years until 1 April 2017, when the full benefit would be available.
The process for identifying the relevant taxable income set out below could be a time-consuming exercise requiring real-time engagement with HMRC:
• Calculate the proportion of the gross income that arises from qualifying patents (excluding finance income). This includes income and royalties received from products paid separately or embedded income included in the price of products.
• Apportion the profits by either:
o apportioning the total profits according to the proportion of qualifying patents income over the total gross income; or
o allocating expenses on a just and reasonable basis to the two income streams of qualifying patents income and non-qualifying patents which could be much simpler;
• Deduct a “routine return” of 10% to reflect the element of profit that would be available even if there was no patent protection.
• Deduct a “marketing assets return” to reflect the value of assets such as brands
Businesses should consider the following:
1. participating in the final consultation in February 2012
2. apply for patents to increase protection as normal, but also to take advantage of the reduced tax rate when it comes into force
3. take the opportunity over the next year to identify which of their patents would qualify to enable them to benefit from the reduced rate. This could include patents held abroad or R&D carried out abroad.