Patent tax break takes effect in April 2013
'Patent Box' is strong incentive for UK companies to develop IP
A 10 per cent corporation tax rate will apply to profits from companies' worldwide trading activities which are attributable to qualifying patents, the Treasury confirmed in draft Finance Bill 2012 legislation published today, establishing the 'Patent Box' tax regime.
The Patent Box will allow companies to elect to apply a 10 per cent rate of corporation tax from 1 April 2013 to all profits attributable to qualifying patents, whether paid separately as royalties or embedded in the price of products.
"The Patent Box will provide an additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products," the consultation response says. "This will encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK’s position as a world leader in patented technologies."
Qualifying patents will be those granted by the UK's Intellectual Property Office or the European Patent Office.
The response document states that the government intends to compile a list of other EU member states that have patent regimes with comparable patentability criteria and search and examination practices to the UK, with the intention of extending the Patent Box to include those regimes.
The regime will also apply to other qualifying intellectual property rights such as regulatory data protection (also called "data exclusivity"); supplementary protection certificates (SPCs), and plant variety rights. Other non-qualifying profits in these companies will continue to be taxed at the main rate of corporation tax.
The draft legislation confirms that, as proposed in the last consultation document, the Patent Box will apply to existing as well as new intellectual property (IP), and to acquired IP provided that the group has further developed the IP or the product which incorporates it.
"It is welcome that the regime will apply to existing IP as well as new IP, and that the Government has listened to points raised in the consultation around the compliance burden of the regime," said John Christian, a tax expert at Pinsent Masons, the law firm behind Out-Law.com. "A workable regime is emerging and business will be positive about the proposals.”
The response to consultation document confirms that the regime will be phased in over five years in order to manage the cost of extending the regime, despite some responses to the consultation which called for the regime to be phased in more quickly to provide a greater incentive for groups to invest in the UK in the early years of the plan.
The response to the consultation gives details of further changes that the government proposes to make to the patent box regime which it states will "result in a more competitive and accessible regime".
The draft legislation sets out a structured approach to calculate the profits from qualifying IP.
For companies selling patented products or licensing their patents, the calculation starts from the total profit from the sale of products incorporating the patented invention or the profit from licensing the invention. The full rate of corporation tax will still be charged on a 10 per cent routine return on certain costs and on any part of those profits which is attributable to marketing intangibles.
Companies making smaller claims can choose a simpler calculation avoiding the need to value their brand. All remaining profit will be eligible for the Patent Box rate.
"Businesses will be able to benefit regardless of how they use their IP – whether it is licensed to others, included in products they sell, or used in internal processes or to provide services," states the consultation response.
The main rate of corporation tax from April 2012 is currently planned to be 25%, following the proposed reductions from the current rate of 26%.
A Treasury consultation paper consultation paper (52-page/587KB PDF) published in June 2011 asked for the view of business on the proposed design of the Patent Box.
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