Government patent box proposal not as generous as hoped
The Government have released details of the much anticipated “patent box” proposal, which would have a start date of 1 April 2013.
A company that holds UK or EU patents and actively exploits them will pay corporation tax at 10% on a part of its profits if it opts into the patent box regime. Income relating to other valuable intellectual property, such as brands, copyright and trademark will not qualify for the patent box if the proposals go ahead in their current form.
The consultation document includes a proposed basis to compute the amount of the company’s “patent box” profits. This is not at a simple process, with a complex three step approach in order to arrive at the profits qualifying for the patent box.
Having performed these detailed calculations, the end result is somewhat disappointing. The consultation document gives the example of a company with 70% of its income arising from patent activity, which works out as £158. However the end result of the three step calculation is that only £44 of the £158 will qualify as profits for the patent box, so even the Government’s own example shows that the benefit will not be as large as many had hoped. Furthermore, the proposal is to phase the regime in over five years by only allowing 60% of the qualifying profits in 2013/14 with 10% increases annually for five years, until 100% is allowed in 2017/18. Thus, going back to our example, in 2013/14 only 60% of the £44 will actually qualify – a mere £26.
What might the tax cash savings be? Taking again the consultation document’s example, the company would see its tax bill reduce from £56 to £52 – a small reduction considering that 70% of its income is from patents.
There is an irony in this proposal. At the same time as setting up an office for tax simplification to remove complicated tax reliefs the Government are proposing a new complicated tax relief. Whilst the tax relief is very welcome we would hope that some of the complexity will be removed before it’s included in next year’s Finance Act.
The Government has asked for responses to its consultation document by 2 September 2011, so companies with a high proportion of income from valuable IP should consider making representations.