Under the patent box, a reduced rate of corporation tax (10 per cent) will apply to profits arising from patents. When originally announced in 2009, this was presented as a way of protecting British jobs in R&D, but the emphasis has now shifted to a more honest aim of dissuading companies from moving their patents offshore and thus protecting tax revenues.
The most important change is to the range of patents which will qualify for the reduced tax rate. In the original proposal, the patent box provisions would have applied from 1 April 2013 to profits arising from patents which were first commercialised after 29 November 2010. However, it was suggested during the previous consultation that this would not prevent patent proprietors from moving their earlier patents offshore, and so the Treasury are now proposing a system which applies to patents regardless of when they were commercialized. This system will be phased in gradually, starting in the 2013/2014 tax year, and will be in full effect by 2017/2018.
The Treasury have also made it clear that only patents granted by the UK Intellectual Property Office (UKIPO) and the European Patent Office (EPO) will qualify, at least initially. This may be extended later to include patents granted by other examining authorities, but it is unlikely to extend as far as patents granted by the US Patent and Trademark Office (USPTO), in view of the broader range of subject matter (such as business methods) which the USPTO are prepared to patent.
In addition, only granted patents will qualify; applications for patents will not, although it is currently intended that four years of backdated benefit can be claimed in the year of grant. As the UKIPO tends to grant patents rather more quickly than the EPO, companies which normally only file European applications may need to consider whether national applications should be filed in the UK in tandem with EPO filings, so that a granted patent (and the resultant tax benefit) can be obtained sooner.
The largest gap to be filled is the formula for calculating the profit which benefits from the reduced tax rate. Of course, income directly obtained from patents (such as royalties from a licence) can be easily quantified, but the part of the profit obtained by selling a product protected by a patent (so-called “embedded income”) which can be attributed to the patent itself is harder to put a figure on. The Treasury have now told us how they expect this to be done.
The calculation of the relevant profit involves several steps; firstly, qualifying profit (the profit associated with patents rather than from other sources) is calculated. The qualifying profit is then divided into “routine profit” (which would be expected from a company whether or not it held patents) and “residual profit” (resulting from the intellectual property held by the company), and the profit arising from brands, trademarks and the like is stripped out, as these are not part of the patent box.
More details of the proposed calculations can be found in the consultation document, and although the calculations are quite involved, the Treasury intend that they will be applied as part of a self-assessment system. However, it should be remembered that the patent box is an “opt-in” system, and no-one will be forced to assess their profits in this way.
The consultation document makes it clear that profits arising from the sale of spare parts protected by patents will qualify for the patent box. The situation regarding complex products is less clear; for example, if a patent protects a specific part of a car, does the profit from the sale of the entire car count, or just that from the specific part?
In the previous round of consultation, the Treasury received less than one hundred responses to the consultation document, but these still led to considerable changes in the proposed system. The latest consultation document raises a number of specific questions, and invites comments by 2 September 2011.
The Treasury’s latest consultation document on the Patent Box is available here.
Jason Stevens is an associate at patent and trade mark attorney firm, Dehns.