The 2009 Budget announced that the UK Government would consider changes to the way the tax system encourages innovative activity and the relative attractiveness to global firms as they make decisions on where to locate their research and development and other innovation activities. This was followed by the 2009 Pre-Budget Report (PBR) announcement that the Government would introduce a reduced 10 per cent rate of corporation tax for income which “stems from patents in the UK” (a so called “Patent Box”).

The PBR announcement made clear that it is intended that the new rules will apply to patents granted after the legislation is passed (in 2011) and to income from April 2013.

What is not clear, however, is which patents will be caught by the proposed new rules. The PBR announcement states that the purpose of the proposal is to encourage research and development in the pharmaceutical and biotech industries, but it remains to be seen whether the rules will be limited only to these industries.

Also, no detail has been provided as to what will constitute “income which stems from patents in the UK”. It is logical to assume that to be eligible under the rules a patent must be the result of innovation which has taken place in the UK, but will the rules apply only to income from UK registered patents arising from such innovation or will they also extend to income from patents which are registered in third countries which arise from the same innovation? Will the rules only apply to income resulting from out-licensing of patents, or will income arising from the sale of patented products, or of products made to a patented process, also be covered (and where a product or process is covered by both eligible and ineligible patents, how will this be dealt with)? Will a UK purchaser of eligible patents also be entitled to benefit from the rules, or will the rules only benefit the original innovator?

It has also been queried how the legislation will be tailored to fit with the amortisation of intangible fixed assets rules and R&D tax credits and even whether the restriction of the proposed rule to income stemming from patents in the UK will be EU compliant.

All these questions should be considered during the consultation process.

While there are grumblings, the overall reaction has been that the Government has taken a positive step towards recognising that something needs to be done to maintain the UK’s competitiveness in this area. The coming months will be an opportunity for industry lobbyists to become more involved with the legislative process by engaging with the consultation and perhaps to have some impact in broadening the ambit of the Patent Box. On another note, as the election approaches, it will be interesting to see whether the opposition offers a more competitive tax regime for innovation.