The British Patent Box: consultation advances

The Patent Box comes
out of the closet ...

In November 2010 the United Kingdom announced its intention to establish a 'Patent Box'. As the Treasury explained at the time,

"The Government is consulting on a preferential regime for profits arising from patents, known as a Patent Box. The intention is to introduce rules in Finance Bill 2012.

The Patent Box will encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK. It will also enhance the competitiveness of the UK tax system for high-tech companies that obtain profits from patents ...".

Last week the Government released the next stage of the consultation on its Patent Box proposals. You can read the consultation document here.  The Government now seeks views on the points raised in the consultation document.  These must be received by 2 September 2011.  Between now and that date, the Government will be continuing to consult businesses on its proposals.

This blogger's colleagues at Olswang LLP have taken quite an interest in these proposals and plan to respond to the consultation after seeking views on the proposals from business and interested parties. A summary of the firm's response to the first stage of the consultation, following discussions with clients and contacts in the high-tech, pharma and life sciences sectors, runs like this.

"Olswang's consultees were generally supportive of the Patent Box proposal.  However, a number of suggestions were made regarding the design of the regime, some of which were considered would be critical to its success. 

Appropriate conditions for a patent to qualify 

Eligible Patents

• It is understood the Government intends to limit the regime by reference to patents registered in particular jurisdictions.  The Patent Box regime should recognise patents from EU member jurisdictions, the United States of America, Japan, Australia, Korea and the BRIC countries (although income subject to corporation tax from products sold in/ licences to any jurisdiction should fall within the regime if a relevant patent is registered in only one qualifying jurisdiction).

• The Patent Box should apply to acquired patents, not just those based on technology developed by the patent holder. 

Ownership Criteria

• Beneficial ownership should take precedence over legal ownership.  Exclusive licensees should also qualify for the regime.

Commercialisation Condition (the Government has proposed that all patents first commercialised after 29 November 2010 will qualify for inclusion in the Patent Box)

• Initial commercialisation could be the date that a product protected by a patent is first offered for sale to end-consumers.  Similarly, for patent licence income from easily identifiable patents, the date of initial commercialisation could be the date that the patent was first licensed. 

• A number of representations were made that, in order for the UK Patent Box regime to be both practicable and competitive, it should apply to all embedded patent profits and licensing related profits received from eligible patents from 1 April 2013.

Determining patent income

• Receipts from disposals of patents and other receipts of a capital nature should be included within the regime.  This is to reflect (and avoid distortion of) commercial actions.

• A simple formulaic approach to determine the proportion of income that falls within the regime is to be welcomed.  However, companies should be given the option of using transfer pricing methods to determine the correct amount of income.

Commercial alignment

• The Patent Box should not result in a narrowing of the Research & Development (R&D) tax credit regime, nor should it claw back the benefit of R&D tax credits or enhanced deductions.

• For the regime to reflect commercial reality it should apply to income generated prior to the grant of a patent; the date of publication may be appropriate.  However, we understand the Government may take the approach that the regime should not apply unless and until a patent is granted and that, once a patent is granted, credit for pre-grant profits be given by way of an enhanced corporation tax deduction in the tax year in which the patent is granted.  We have suggested that any such approach should be carefully considered as it may undermine the competitiveness of the UK's Patent Box regime.

• If a patent is granted and then revoked there should be no claw-back of the benefit of the regime on the pre-revocation profits.

Preventing artificial tax avoidance

• We would expect that the high costs of obtaining and maintaining a patent would, in itself, deter artificial behaviours in relation to the Patent Box regime. 

• If the Government insists on including an activities based restriction, it should be the case that historic R&D activity should also be taken into account (rather than only ongoing R&D or manufacturing which the Government stated it was considering).

Further general views

• It is understood that the Government will not at this time introduce a regime that applies to income deriving from IP generally; it is suggested that the Government review this position in due course.

• It is suggested that all IP income deriving from R&D activity should be included in the scope of the regime.  At the very least "know-how" that is inextricably linked to a qualifying patent should be included within the regime.

• Income obtained whilst a product is protected by a supplementary protection certificate should be included within the regime. 

• Income connected with services related to qualifying patents should be included within the regime.

• The regime as currently proposed would appear to be easier to apply to products that are protected primarily by one or only a few patents and for companies that licence easily identifiable rights.  In particular, it would appear to be much more challenging to apply to complex technology products and licences of patents relating to complex technology.  The regime should be structured such that it provides a sufficient tax incentive for innovative companies across all high-tech sectors in order to achieve its stated aims.

• The regime must be easily accessible and simple to apply.  Procedures for obtaining advance clearances should be introduced. 

• The effectiveness of the regime should be reviewed on a regular basis and its terms adjusted to deal with perceived and practical difficulties".

Anyone wishing to comment on the consultation document, or on the views expressed above, should email Natasha Kaye or my SPC Blog colleague Robert Stephen.  IP Finance is also pleased to hear from other bodies, firms and individuals who are seeking comments or intending to make submissions: just email me here with the subject line 'Patent Box'.