The Patent Box regime is intended to make the UK tax system competitive for innovative high-tech companies. The regime will allow companies to apply a 10% corporation tax rate to profits attributed to patents from 2013.  The current consultation which expired today explains how the Patent Box is intended to work. The consultation will be followed by draft legislation in autumn 2011. The current proposals provide that the regime will apply to all patents but the benefits will be phased in over a five year period.

In addition:

·         The patent profits will be calculated on transfer pricing standards and methodologies, for example when apportioning residual profits between those due to the patent and those due to other intellectual property such as valuable brands or trade marks.  This will mean that external and internal licences and other agreements will need to be carefully drafted, negotiated and coordinated.

·         In order to benefit from the 10% tax rate, qualifying patents must have been granted by the UK’s Intellectual Property Office or the European Patent Office.  The Government is considering whether the regime should be extended to patents granted by the national patent offices of some other EU countries, but has ruled out patents granted by national patent offices outside the EU. 

·         Once a patent has been successfully granted, the company will be able to claim Patent Box benefits for any income which arose between the date of the patent application and the date of grant (subject to a four year cut-off).

Issues to Consider

·         The proposals would confer no benefit in relation to income from ancillary services such as maintenance.  Apportionment of income between products and services will become critical, and this will further impact correlation of external and internal remuneration under strict transfer pricing rules.

·         The taxpayer claiming the benefit must not only hold a relevant patent, but must be actively involved in managing exploitation of the invention.  It is not clear what this means.

·         Benefits can only be claimed if the relevant group of companies have performed significant development of the invention.  In the case of acquired patents, this means post-acquisition development, and there is uncertainty as to how this will work.

·         Damages for patent infringement will qualify for Patent Box relief, which may become a factor in European litigation forum shopping.

·         The tax benefits of the Patent Box can be expected to become relevant to employee inventor compensation calculations.

·         Further complexities arise in the technology sector, where interoperability dictates the cross-licensing of multiple patents between competitors.

Under the current proposals there must be a UK or EP patent in order to qualify for the beneficial tax regime.