Matt Watts looks at the latest proposals for the patent box regime and considers whether they will help encourage businesses to stay in the UK.
The patent box regime will provide for a lower rate of corporation tax for profits derived from qualifying patents from April 2013. It has been hailed by the Government as one of the measures that could once again help the UK compete as a jurisdiction of choice for international business. Yet many of our European neighbours have already implemented similar regimes, so we are essentially playing catch up. If the regime is to achieve its stated goal and persuade businesses to remain in the UK – or even to move here, it needs to be competitive and practical.
Reduced corporation tax
Under the current proposals, qualifying profits will be subject to a reduced rate of corporation tax at 10%, to be phased in gradually from 2013 to 2017. While this is substantially less than the main rate of corporation tax (currently 26%, but decreasing to 23% by April 2014), it falls short when compared to other patent box regimes against which we are competing. For example, the Netherlands at 5% and Luxembourg at 5.76% provide much lower rates. Indeed, the Netherlands reduced its rate from 10% to 5% to increase competitiveness. So, unless the UK reduces its rate, it may struggle to achieve its intended goal of being a top location of choice for innovative industries.
Complex calculations
Calculating which profits will qualify for the reduced rate also needs further consideration. Under the current proposals the rules are complex and there is a risk that, practically speaking, the regime will only be available to the largest companies that can justify the additional compliance costs associated with the calculations due to the scale of their operations.
If the regime is to act as a stimulus for the UK economy, then surely its appeal needs to be widened to companies outside of the FTSE100? Again, the regime in the Netherlands provides a compelling comparison, as the lower rate is applicable to all profit derived from an asset if 30% or more of the income derived is attributable to the patent.
Don't miss the boat
There can be no quibbling with the aims and rationale for the Government introducing the patent box regime and, if implemented correctly, it could make a significant contribution to the UK economy. However, the Government needs to make bold decisions now to ensure this goal is achieved, including whether to extend the regime to other forms of intangible assets other than patents, making it practical to access for more companies and lowering the rate of corporation tax or introducing a small companies' rate.
While this may be difficult to justify in these times of austerity, it is hard to see how the trend of companies relocating their intangible assets offshore – Virgin Enterprise (which has rights to the Virgin brand) being a recent high-profile example – will otherwise be reversed.
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