THE second of the Patent Box consultation documents was issued on 10 June. While undoubtedly a complex document, the intention to create a favourable regime that is manageable in terms of complexity is good.
The Patent Box aims to dramatically cut the tax on revenues generated from patents held by UK companies.
There are some sticky points, clearly identified in the document, which gives companies the opportunity to engage in discussions to determine the final structure of the regime.
The aim of the Patent Box is to “to encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK, and maintain the UK’s position as a world leader in patented technologies.”
It intends to achieve its policy objectives by taxing the worldwide profits attributable to patents held by UK taxpaying companies at 10%, rather than the 24% corporate tax rate that will be in force in April 2013, when it will come into force.
The definition of holding a patent has been widened to cover almost every business model and industry. Many companies selling products will find that at least some of their product range will be in the Box, which at one stroke has shifted the regime from niche interest to mainstream importance.
Service companies and process intensive companies are also catered for in a sensible, albeit slightly more complicated, way. The definition of income derived from a patent has also extended.
As well as the obvious case of licensing income, income embedded into product prices and the outright sale of patent rights are included (much to the delight of the biotech industry).
There are, inevitably, areas of uncertainty. Patents must be “actively” held, whatever that turns out to mean, and claimants must be “actively involved” in the decision making over how patents and products are commercialised.
The basic theories are sound – the Treasury doesn’t want passive holdings to qualify, which would be contrary to its policy aims – but it’s hard to imagine how the legislation will look in practise.
That said, it’s clear that the Box is still a malleable beast and we have faith that the Treasury will take heed of taxpayer concerns. The main issue is the formula that calculates how much of the profits arising from a company’s patented products should be in the Box.
It starts with the taxable trading profits, and then strips out (i) profits earned on non-qualifying products; (ii) the routine return from qualifying profits to leave the residual profit attributable to innovation ; and then (iii) the non-patent element of the residual profit.
The question that a company needs to ask is: does this formula work for me? The routine return is calculated as 15% of costs, which is too high. Surely 5% is a more appropriate mark-up. But the real issue is the stripping out of the non-patent element at step 3.
The Treasury proposes to apply the ratio of R&D to marketing spend to the residual profit as a proxy for the patent profit, which gives capricious results. R&D spend is far from a true approximation to patentable activities, and marketing spend does not equate to non-patentable innovative activities. Even if they were, it can’t be right that two companies with identical R&D spends but differing marketing spends will end up with different profits in the Box.
We will be making representations on this point, and would encourage companies to do the same.
Sally Grimwood is a director in Deloitte’s Tax policy group. Carmen Aquerreta is a tax partner in the R&D and Patent Box team at Deloitte
Does Darwin's theory apply to taxation? Colin ponders...
The UK tax gap fell in 2014-15 to its lowest-ever level of 6.5%, revealed official statistics published today
Changes to the tax system is urged to support the growth of entrepreneurs, found a report from the Grant Thornton UK, the Institute of Directors, and the Prelude Group
The EC has been instructed to draft a European Union (EU) directive authorising an EU financial transaction tax, which would apply to ten of the EU’s 28 member states