The Government has now published (29 November 2010) its thinking on the taxation of innovation and intellectual property as part of its proposed Corporate Tax Reform.
The document acknowledges that there are currently no specific incentives for companies to retain IP in the UK during commercialisation. In contrast, several other jurisdictions provide incentives for companies to own and exploit IP, particularly patents, in addition to R&D incentives. As a result, the UK tax regime can be uncompetitive for companies to hold and exploit patents. This provides incentives for businesses to transfer patents offshore prior to the full realisation of their value, in order to benefit from more advantageous regimes elsewhere.
To encourage businesses to retain and exploit IP in the UK the proposal is the introduction of the Patent Box. The aim of the Patent Box is stated as rewarding successful technical innovation.
In summary the proposals are:
A 10% rate for profits arising from patents, to apply from 1 April 2013.
The regime to focus on patents rather than on other forms of IP. This is because it is believed that patents have a strong link to ongoing high-tech R&D and manufacturing activity which the Government sees as a priority to encourage in the UK. They are also clearly identifiable, and provide exclusive legally protected rights to exploit a novel product or process.
The 10% rate to apply to net patent income after associated expenses, including pre-commercialisation expenses, rather than to gross income.
All patents first commercialised after 29 November 2010 will qualify for inclusion in the Patent Box. More detailed qualification and transitional rules will be discussed during the consultation period.
Available to both royalty income and “embedded‟ income, that is included in the price of patented products.
To determine the proportion of income commercially related to patents (“embedded”), either the “arm’s length principle”, as set out in the Organisation of Economic Co-operation and Development (OECD)‟s Transfer Pricing Guidelines to be applied, but for the sake of simplicity the Government favour the adoption of a largely formulaic approach.
Potentially link the amount of income which can be attributed to the Patent Box to the level of ongoing R&D or associated manufacturing activity.
While the Patent Box will not apply until 1 April 2013 it does impact upon patents commercialised after 29 November 2010 so it is relevant to current operations and the management of your IP.
The Government has requested responses to the proposals by 22 February 2011. The full document can be found at:
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