Patent box "formula" needs tweaking, advisors warn

PROPOSALS to calculate how much profit a company made from a patent to qualify for a reduced corporation tax must be reformed before the initiative goes live, advisors have warned.

The government’s “patent box” consultation proposes a reduced rate of 10% corporation tax on products that have been patented, such as pharmaceuticals, in a move to encourage innovation.

Tax professionals have welcomed the initiative. However, there are concerns around the formula to calculate how much of the company’s profits are eligible for the 10% rate.

Sally Grimwood, a director in Deloitte’s tax faculty, said the proposals are going in the right direction. “This is looking pretty good in the main. It is very sensible and a great example of where government has listened to what people think. With this one, we were given a blank sheet of paper in November 2010,” she said.

But the formula for working out the profits that are eligible for the rate must be tweaked, she added. Under the government’s formula, companies must work out how much of their overall turnover related to the patented product. It must then deduct 15% of this figure as “routine profit” that companies would normally charge for labour, overheads and the like.

However, 15% is too high a figure, said Grimwood. The actual figure is closer to 5%-7%, she said, and imposing 15% would reduce the incentive to innovate.

Jonathan Bridges, an associate partner at KPMG, said the consultation was good news for UK businesses. But he said other forms of intellectual property should be rewarded.

“The government is recognising intellectual property generally. But it is only rewarding certain forms of IP. I would challenge whether this is to limit the cost.”

Software groups cannot patent their good ideas in the UK unlike in other jurisdictions and so will be restricted, he said.