 Patent box savings to be phased in
HM Treasury and HMRC issued joint consultation documents on 31 May 2011 regarding proposed reform of the R&D tax relief rules and the introduction of a new regime for profits arising from patents (the so-called ‘patent box’). The proposals are intended to take effect from 1 April 2013 for the patent box.
The broad proposal is that profits attributed to patents and some other limited forms of IP (intellectual property) arising from 1 April 2013 will be subject to a lower rate of corporation tax. The regime would apply to the worldwide income generated by both old and new patents granted by the UK’s Intellectual Property Office and the European
Patent Office. Patents granted by other bodies may be eligible and the Government is consulting on this. The regime could apply to both the legal owners of patents and those holding an exclusive licence to exploit them commercially. In either case, the company must be actively involved in the on-going decision making connected with the exploitation of the patent and must have performed significant activity to develop the patented invention or its application.
Companies would only be required to identify their total patent profit per year, rather than splitting this out by individual patents, but the proposed process for calculating such profits appears particularly cumbersome. For example, the company would be required to identify the ‘residual profit’ that it might be expected to earn as the holder of IP, but only to take into account the proportion of that profit that is due to its patents and closely related IP. Thankfully, it is proposed that companies will be free to opt in and out of the regime at any time and some companies may choose to remain outside if the prospective tax saving is small and the administration cost in identifying that saving is comparatively high.
It is also proposed that the benefit of the regime will be phased in over a series of 5 years and so the intended 10% tax rate will only apply from 2017/18. The document proposes that the benefit is provided by way of a ‘patent box tax deduction’ from total profits rather than a reduced rate for eligible profits in order to avoid the problems that recognising a ‘patent box loss’ would have created. However, the effective tax rates on patent income (assuming corporation tax rates take effect as currently suggested) will be as set out in the table below.
 | 2013/14
%% | 2014/15
% | 2015/16
% | 2016/17
% | 2017/18
% |
Corporation tax
main rate*
small company*
patents* | 24
20
10 | 23
20
10 | 23
20
10 | 23
20
10 | 23
20
10 |
| Proportion of benefit available | 60 | 70 | 80 | 90 | 100 |
| Large company patent income | 15.6 | 13.9 | 12.6 | 11.3 | 10 |
| Small company patent income | 14 | 13 | 12 | 11 | 10 |
* As currently proposed
|