The Treasury has published (a few days later than originally advertised) the next round of consultation on the patent box (pdf).
- extended to plant variety rights, data exclusivity and supplementary protection certificates
- will apply to UK and EPO patents only
- will apply to all UK and EPO patents, no matter when commercialised or granted
- to be phased in over 5 years, from 2013/14 – full benefit not until 2017/18
- a seriously complex round of computations will be involved, with analysis of income and expenses across the company and possibly by division required
Responses to the consultation are requested by 2 September 2011.
The consultation paper builds on the previous round of consultation, with more detail on the proposals following the responses to that round. There is still no draft legislation to consider, as the paper focussed on the high level principles involved.
Key points from the consultation:
- the patent box proposals are to be extended to income from: data exclusivity (regulatory data protection), plant variety rights, and supplementary protection certificates (for pharma and agrochemical patents) as these are considered to be appropriately subject to external scrutiny before being granted.
- qualifying patents will be those granted by the UK Patent Office and the European Patent Office only – the UK is usually quite accommodating about foreign IP but the wider range of patents granted in (say) the US is clearly a step too far for the UK Revenue. The consultation indicates that the Government is open to the idea of including patents granted by other national authorities where the local examination process, and scope of patentable ideas, is similar to that in the UK. However, it will not include non-UK/EPO patents that could have been protected by patent in the UK but have not been so protected – the consultation paper notes that HMRC is not in a position to judge whether the UK Patent Office would have granted a patent. This may lead to an increase in patent registrations in the UK; I doubt whether anyone has considered the additional resource issues that might arise for the Patent Office as a result.
- outright ownership of the patent will not be required: the patent box will be available to UK companies with an exclusive licence (as to field or territory) to a licence, where there is effective market exclusivity.
- It appears that the licensor (if a UK taxpayer) will have the advantage of the patent box for the royalty income, and the licensee could (presumably) have the advantage of the patent box on the ’embedded income’ in profits from manufacturing.
- This is fairly theoretical because it is also proposed that – to be able to claim the benefit of the patent box – the taxpayer must be actively involved in the ongoing decision making in respect of exploitation of the patent. In addition, the taxpayer must have performed “significant activity” to develop the patented invention or its application. It’s not impossible, as a result, that neither the licensor could claim the patent box (where it is not actively involved in the ongoing decision making once a licence has been granted) nor the licensee (where it has not performed significant development activity). Legal protection and management of a financial investment won’t count as activity or involvement.
- qualifying income will be that earned worldwide by a UK company on such patents – this is perhaps likely to be more important for embedded income relief under the patent box (that is, income from utilisation of the IP rather than income from licensing).
- when considering embedded income, the patent must genuinely contribute to the product producing the income (it’s not enough to simply say it’s protected by patent).
- compensation and damages for infringement of a patent will qualify as income from patents.
- income from products made using a patented processes may qualify where an arm’s length royalty can be imputed for the use of the patent.
- income from the sale of patents will qualify for the patent box rate (although if the patent is held in a separate company, and the company’s shares are sold rather than the patent, the substantial shareholdings exemption could mean a 0% tax rate on the gain instead …)
- the patent box rate won’t apply to income between application and grant of the patent at the time it arises but, once that patent has been granted, the company can claim the benefit of the rate for that income (up to four years). Rather than having to re-open the previous returns, this will be done by way of reduction of tax in the year the patent is actually granted.
Calculating the profits
- The patent profits (for tax purposes) are to be calculated on a three-step basis:
- apportion trading profit and expenses to calculate qualifying income (how this is done will depend on what the patent box rate is claimed for – it will be based on the taxable profits, not accounting profits). The enhancement element of qualifying R&D expenses is excluded (but not the R&D base cost) to make sure that the profits aren’t lowered too far. The apportionment is done on a pro-rata basis according to the proportion of total trading income that is qualifying income. This can be done on on a division-by-division basis – certain companies will be required to calculate on a divisional basis to avoid too much profit going into the patent box: generally this will be where profit margins vary significantly by division, or where a company uses a patented process to make products that don’t specifically incorporate patents.
- then calculate the ‘residual profit’, the routine profit earned from having IP – this is a fixed percentage (15%) relating to routine activities, which is deducted from the profits attributable to qualifying income in the first step.
- then identify how much of the remaining qualifying residual profit is due to the patent and closely related IP, and how much to other forms of IP. This could be done by considering the ratio of expenses incurred by the company that are classified as patent expenses.
So that’s all easy, then [cough]. One starts to see why this is not a mandatory regime.
The November consultation suggested that all patents first commercialised after 29 November 2010 would qualify; this consultation paper now considered that this sort of cut-off date might not work all that well – the date of initial commercialisation can be hard to define (no kidding!), and a single date would require transitional rules for up to 20 years until all older patents have expired.
So the suggestion is now that the patent box will apply to all UK/EPO patents, but phasing in the benefits over the first five years of the patent box – effectively, 60% of the benefit would apply in 2013/14, then 70% in 2014/15 etc until 100% is available in 2017/18. It will still only apply to profits arising after 1 April 2013.