Patent Box regime is now even better news for R&D-led businesses

The draft legislation set out for the Patent Box today will be welcomed by all businesses that invest in innovation, not least small and medium-sized businesses, which may not have been convinced of the benefits of patent protection in the past.

From April 2013, any profits from inventions that are protected by a UK (or other qualifying) patent will be taxable at a significantly lower rate of Corporation Tax – just 10%, instead of the current rate of 28%, falling to 24% in 2013. This tax rate compares favourably with regimes in other parts of Europe and is below the effective rate of tax that applies to patent profits in France and Spain, which is 15%.

From the Government’s perspective, the regime is intended to make the UK corporate tax system more competitive and attractive to R&D-led businesses. In doing so, it is hoped that this will encourage them to stay and invest in the development of market-ready products, creating valuable jobs and generating profits taxable in the UK at the same time.

Karl Barnfather, partner and patent attorney at Withers & Rogers, said:

“Since it was first proposed in November 2010, the Patent Box sounded good on paper and now it is even better. The draft legislation has addressed many of the concerns raised about the regime’s competitiveness.”

When considering how the tax regime would work in practice, some businesses were concerned that it might be too complex to work out the profits attributable to a patent and the tax benefit would not be felt widely enough.

The draft legislation appears to have addressed many of these early concerns. When calculating the net profit attributable to a patent, it had been proposed that the patent owner should take into account certain defined costs, but excluded profits that represent less than 15% of the overall costs. In the draft legislation, this ‘mark up’ has been reduced to 10%, thus boosting the profits that can be taxed at the reduced rate. In addition, the Government has proposed excluding expenses qualifying for R&D tax credits, which will further increase the profits eligible for the Patent Box and improve the overall competitiveness of the regime.

Patent owners had also been concerned about how they would differentiate between profits attributable to a patent and those attributable to the value of a brand and the impact this could have on any tax benefit. In line with comments made, the Government has decided to allow companies to calculate an arm’s length royalty and apply this when calculating qualifying profits. This is a much simpler system and could potentially allow companies to attribute more value to the patent. A further boost for innovative companies is the increase in eligible profits in the ‘small claims safe harbour’ which has been raised from £0.5m to £1 million. This will encourage smaller companies to engage in the Patent Box without worrying unduly about complex tax calculations.

Karl Barnfather adds:

“For small and medium-sized businesses in particular, the arrival of the Patent Box regime should encourage them to rethink their approach to patents. In the past, some smaller businesses may have disregarded patents in the belief that the time taken to obtain them – typically 1.5 to 4 years (although the process can be accelerated) – would render them commercially worthless.

“Under the new regime, a single patent now has an inherent value based on the tax benefit it could bring to the business.”