HMRC has issued a response to the second consultation document on Patent Box of June 2011. The response is in the form of further consultation on proposed technical changes and draft legislation with comments to be received by 10 February 2012. Whilst the Patent Box will be extended to certain European granted patents, it is disappointing that other forms of intellectual property are excluded. Baker Tilly pointed out in earlier consultation that The Netherlands and Luxembourg have introduced a wider ‘Innovation Box’. This is particularly beneficial to SME’s that may not be able to afford the cost of registering patents in respect of products on which they undertake significant research and development. Notwithstanding this, the new regime is to be welcomed as a step in the right direction in making the UK more competitive.

In detail

The Patent Box regime will be introduced with effect from 1st April 2013. It will permit companies that develop patents to pay a reduced rate of corporation tax of 10% on attributable profits. In more detail:

• The regime, originally to apply to patents granted by the UK and EU patent office will be extended to patents issued by other European States that operate comparable criteria.
• Existing intellectual property (‘IP’) as well as newly commercialised IP will be included, but the benefits will be phased in over a 5 year period.
• Companies will need to elect in to the regime.
• There is a complex formulaic approach to computing the net profits that will be subject to the 10% rate of corporation tax.
• Given the relative complexity of the calculations, there will be a safe harbour limit where a company’s qualifying profits are below£1m (divided by the number of associates plus 1). Qualifying companies within this threshold will be able to allocate 75% of their qualifying profits to the patent box and will therefore avoid having to undertake the complex calculations.
• Where a company makes patent box losses these must be offset against current year patent box profits of other group companies or carried forward against its own future patent box profits.
• There will be a targeted anti- avoidance rule to prevent companies from seeking to obtain an artificial tax advantage by artificially inflating their Patent Box tax deduction.

Draft legislation has been included with the latest round of consultation with the aim of introducing final legislation in the 2012 Finance Bill.