HM Treasury published draft legislation on 6th December 2011, covering the Patent Box, the R&D tax credit proposals and Controlled Foreign Company rules.
The intention is that this new regime together with the UK corporation tax rate will make the UK a more attractive place to innovate.
The 2012 Budget confirmed that Patent Box will provide for a 10% rate of tax on profit for any company generating income attributable to the rights from the ownership of a patent or an exclusive licence to a patent granted by the UKIPO or EPO. SPCs, Plant Protection and Plant Variety Rights also qualify. The new legislation is proposed to come into force in April 2013.
Revenues from worldwide royalties, license fees, product sales and sales of patents that get taxed in the UK will all be allowable and there is no clawback if the patent is revoked. The Patent Box can apply to income arising for up to 6 years before the patent is granted, and in this case the benefit is to be claimed in the year that the patent grants.
Income from patents used in internal processes or to provide services will also qualify but up to the level of an arm’s length royalty for the use of the qualifying IP.
Whilst many companies will not be able to claim the benefit of a 10% tax rate on total revenue, the definition of qualifying income is said to be generous. More specifically, the current legislation allows for incorporating a patented item into a product to qualify the whole product: think of including a patented screen in a TV that allows you to claim the benefit for the qualifying revenue on the whole TV.
The benefits will be phased in over 5 years as follows:
Technology companies will need to subtract a nominal 10% profit that is deemed to have arisen from routine activities to calculate residual profit. The residual profit will then need to be split into that which relates to Patents and non-patent IP (ie brands). Companies with marketing intangibles that contribute to 10% or more of their residual profit will be required to calculate an arm’s length royality for the use of those intangibles in generating qualifying income. The 10% rate is then applied to the residual profit relating to Patents and the notional royalty less any actual royalty paid for use of the brand will be taxed at the full corporation tax rate.
Coller IP is pleased to advise on arm’s length royalty calculations and brand valuation.
The proposals suggested that there will be no impact on R&D claims. The current R&D tax credits regime allows Small and Medium sized enterprises a tax deduction of 200% of R&D costs based on PAYE and NIC contributions. Large companies are allowed 130% deduction. From 1st April 2012 SMEs can claim a 225% deduction of R&D costs. However, the interplay between R&D Tax Credits and the Patent Box regime will need to be carefully managed and early planning will be required if maximum tax advantages are to be achieved
The proposed legislation removed the £10,000 miniumum spend limit and the cap on payable credit based on PAYE/NICs is to be removed, relaxing the rule on expenditure on non-employees. A pilot advance assurance scheme for start ups and SMEs has also be recommended together with a move to an above the line credit system which can then be used to offset other taxes.
Will it work? Watch this space!