Update on the Patent Box consultation

Article by Sandy Bhogal , Sangeeta Puran and Peter Steiner

Originally published 21 June 2011

Keywords: update, patent box proposal, UK tax system

The UK Government has commenced its second public consultation on the Patent Box proposal. The Patent Box is aimed at companies that obtain profits from patents and the current proposal is to introduce, from 1 April 2013, a preferential regime of a 10 per cent rate for profits arising from patents.

The objective of the Patent Box is to encourage companies to locate high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK. The relief seeks to enhance the competitiveness of the UK tax system for high-tech companies that obtain profits from patents. The initial public consultation was completed in February 2011 and formed part of the first stage of the reform process. HM Treasury and HM Revenue & Customs have recently published the Consultation on the Patent Box (June 2011), which releases for public consultation the detailed policy options proposed for effecting the reform, including:

• the proposal for patents qualifying for relief, which will include patents granted by the UK Intellectual Property Office and the European Patent Office. The Patent Box, however, will apply to worldwide income earned by businesses from inventions covered by a qualifying patent, and not just income earned in the territory protected by a qualifying patent. The latest position confirms the decision of the UK Government to exclude from the preferential regime the profits arising from the exploitation of other forms of intellectual property such as trade marks and copyright;
• the proposal for when a company will be considered to hold a qualifying patent, which will require a company (i) to own or have an exclusive licence to a qualifying patent and (ii) to remain actively involved in the ongoing decision-making connected with the exploitation of the qualifying patent and for the company (or another group company) to have performed significant development of the patented invention;
• the proposal for the income that will qualify for relief, which is to include income from product sales where the product incorporates at least one invention covered by a qualifying patent. The relief will not apply to income from product sales where the product is made using a patented process but the final product does not itself incorporate a patented invention and similarly, the relief will not apply to service income. In the case of royalties and licence fees, all such income will qualify regardless of whether the patented invention is used in an industrial process or incorporated into products. The income from the sale of patents and damages for infringement will also qualify;
• a three step model for the calculation of the Patent Box profit. Examples of the calculation of Patent Box profits are provided in the consultation document. Where the Patent Box calculation results in a Patent Box loss, such a loss will not be taken into account in computing a company's current year profits chargeable to corporation tax, but the loss must be carried forward;
• the proposal for opting out of the Patent Box regime, which allows a company to opt out of the Patent Box at any time. If it does so, it will not be able to opt back into the Patent Box for another five years; and
• the computational method for implementing the relief, which allows companies to claim an additional Patent Box tax deduction when calculating the level of taxable profits. The resulting reduced profits will then be taxed at the normal rate of corporation tax. The Patent Box will apply on company-by-company basis, with the policy focus now shifting to the need for anti-avoidance rules in order to maintain the intended scope of the relief. The UK Government also proposes to require all companies claiming the relief to comply with the transfer pricing regime in their transactions with associated companies, pointing to an example of the likely additional compliance burdens for companies who choose to benefit from the Patent Box relief.

Access the Consultation on the Patent Box (June 2011)

Next steps

The deadline for providing responses to the current consultation is 2 September 2011. This consultation forms the final stage before publication of the draft Patent Box legislation (scheduled for publication in autumn 2011).

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