Originally published 1st July 2011

The Government has last month published its revised proposals for the "Patent Box", a tax incentive regime aimed at encouraging the development and exploitation of patents in the UK.

In outline, the proposed Patent Box regime applies a reduced 10% tax rate to certain profits attributable to patents. The original proposals published in November last year were narrow in scope, resulting in limited industry enthusiasm. However, the revised proposals significantly widen the application of the regime and, with a little further work, it now seems possible that the "Box" could become the valuable incentive that both industry and the Government are hoping for.

The key features of the revised Box are set out below, but the defining change has been to extend the regime to income derived from all qualifying patents, as opposed to only income derived from patents first commercialised after 29 November 2010, as originally proposed. The other key change has been to include within the Box income from the sale of patents, enabling access to the regime for smaller, innovative businesses that do not themselves have the ability to commercialise developed patents.

There is, however, further work still to do. In particular, the process for calculating the profit to which the Box applies remains, by the Government's own admission, very complicated. It is this difficult area that is likely to be the focus of discussions between industry and the Government over the next stage of the consultation.

Key features of the revised Patent Box proposals

  • The Box will apply to worldwide profits derived from all "qualifying patents".
  • The Box will begin on 1 April 2013, although the full benefit will be phased-in over a five-year period.
  • "Qualifying patents" are those granted either by the UK Intellectual Patent Office or the European Patent Office, although supplementary protection certificates, regulatory data and plant variety rights are also to be included.
  • The Box will apply to both internally developed and acquired patents, as well as to exclusive licences to commercially exploit patents. However, such patents must be actively managed – income from the passive holding of patents will not be included.
  • The Box will include patents developed in partnership, joint venture or pursuant to cost-sharing arrangements.
  • Broadly, the following sources of income will be included in the Box:
    • Licensing and royalty income
    • Income from the sale of products incorporating at least one qualifying patent
    • Income from the sale of patents
    • Damages and compensation payable for patent infringement
    • Pre-grant income (subject to a four year limitation)
  • The Box will apply to net profits from patents using a formulaic approach to calculate the relevant profit, based upon the transfer pricing "residual profit split" method for identifying and valuing patent profits.
  • Anti-avoidance rules will apply to prevent abuse of the Patent Box regime.

For more information or advice, please contact:

Michelle Thomas
Partner, Head of clean energy and sustainability
Tel: 0845 498 7553
Intl: +44 29 204 77553

David Jervis
Partner, Head of Tax
Tel: 0845 498 4780
Intl: +44 113 200 4780

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.