Summary and implications
The UK government intends to introduce a patent box regime which will allow income arising from the exploitation of patents to be taxed at a reduced rate of 10 per cent. It is proposed that this regime will apply from 1 April 2013.
The Government is in the process of conducting a number of consultations aimed at improving the competitiveness of the UK tax system. It recognises that IP rights are mobile and that it needs to encourage the exploitation of patents in the UK especially given that a number of other jurisdictions already have advantageous tax rates for IP.
The aim is to support high-tech and scientific industry to increase economic activity and high-value jobs in the UK. Alongside the patent box consultation, there is also a consultation on research and development (R&D) tax credits.
What is a “patent box”?
“Patent box” refers to a special taxing regime for income arising from patents. The Netherlands and Belgium already have patent box regimes.
What will the rate be?
The tax rate applicable to net income arising from patents will be 10 per cent. In comparison, the small profits rate of corporation tax is 21 per cent (20 per cent from April 2011) and the main rate is 28 per cent (to be reduced by one per cent each year to 24 per cent in April 2014).
Why does it only apply to patents?
The Government considers that patents have a strong link with high-tech R&D and manufacturing activity. This is in contrast to other forms of IP. Patents are clearly identifiable. Widening the regime to other forms of IP would also be too expensive in terms of tax lost.
What income will be covered?
The patent box regime will apply both to royalty income and “embedded” income included in the price of patented products.
The Government recognises that identifying and quantifying embedded income will be complicated. It has considered either using the “arm's length principle” familiar from transfer pricing or a more formulaic approach to determine the income commercially related to patents. The Government presently prefers the formulaic approach because although it is less accurate, this approach is easier to administer and more certain.
Will expenses be deductible before tax?
Yes. The intention is that the patent box will apply to net income after expenses, including pre-commercialisation expenses. This is to encourage a focus on profit rather than sales. Excluding pre-commercialisation expenses would have created an incentive to delay the commercialisation of a product.
Will there be a cap on the income within the patent box?
It looks like there will be a maximum cap to prevent abuse. This cap may be linked to the level of a company's ongoing R&D or associated manufacturing activity.
Will existing patents qualify when the regime comes into force?
Yes. It is intended that patents first commercialised after 29 November 2010 will qualify for inclusion in the patent box. The Government is consulting as to what constitutes “first commercialisation”. There will be some transitional provisions to ease in the new regime.
Is the regime guaranteed to last for a specified period of time?
No. There is currently no promise that the regime will not be withdrawn in the future.
Will the patent box regime be mandatory?
No. It is intended that a company will have to choose to apply the regime.
When does the consultation finish?
The Government welcomes views by Tuesday 22 February 2011. If you have any comments you wish to make please contact us or HM Treasury directly.
What is the next step?
After this consultation the Government will publish further details on the proposed regime in Spring 2011.