FROM APRIL, the government will introduce changes to tax on the profits from patents that could see the UK become a world centre for high-tech enterprises.The Patent Box will apply a 10% rate of corporation tax to profits from patents. It will help to maintain the UK’s position as a world leader in patented technologies and encourage companies to locate the high-value jobs associated with patents here.
Our aim is to make the UK’s tax system the most competitive in the G20 and make the UK the best place in Europe to develop a business. Beneficiaries will range from the smallest start-up to the largest multinational. The Patent Box could help up to 5,000 of our most innovative companies. A wide range of sectors will qualify, particularly high-tech industries such as life sciences, electronics and defence.
Under the new regime, the profits on patents held by UK tax-paying companies will be taxed at just 10%, as opposed to the 23% corporation tax rate that will apply from April. During the process of creating the new regime, significant changes have been made to the original proposal to ensure it is competitive and cost-effective.
For example, its introduction has meant £500m of investment by GlaxoSmithKline (GSK) will generate about 1,000 new jobs across its sites and centralise its intellectual property in the UK. GSK’s CEO, Sir Andrew Witty, has said: “The introduction of the Patent Box has transformed the way in which we view the UK as a location for new investments, ensuring that the medicines of the future will not only be discovered, but can also continue to be made here in Britain.”
The Patent Box will benefit businesses that hold or license patents. The companies will have developed or be managing the invention to be eligible. The technology can be licensed, included in products, or used in internal processes or to provide services. If a company is a member of a group, it may qualify if another member has undertaken the qualifying development. The Patent Box applies to all profits attributable to qualifying patents, whether received as royalties or embedded in the sale price of products.
For many companies, the rules allow a largely formulaic approach, to simplify the difficult task of determining patent profits. This will improve certainty and minimise administrative burdens.
The Patent Box will be phased in over five years, with the full benefits available from April 2017. It will cost £350m in the first year, later rising to £960m. A patent must have been given by the UK or European patent office. A Statutory Instrument to include patents granted by other EEA countries will be laid before parliament.
We will keep the regime under review to ensure it is benefiting business, and will take action if attempts are made to exploit it for tax avoidance. Reforms to the corporation tax system such as the Patent Box are designed to boost economic growth. As the private sector is critical to recovery and tackling the deficit, the UK must demonstrate it is open for business.
To improve tax competitiveness, we have reduced corporation tax, which will benefit all companies, reformed the controlled foreign companies regime, and will be introducing an above-the-line R&D tax credit to support investment in the UK. The Patent Box is a key part of that commitment. Figures from the Institute for Fiscal Studies show the scheme will double the number of patents held in the UK.
HMRC is encouraging companies to discuss their potential Patent Box claims with their customer relationship managers or the Maidstone R&D Unit. It is our belief that this new regime will encourage innovative businesses to invest and locate significant jobs and activity here, as well as enhancing the competitiveness of our tax system for high-tech companies. ?
David Gauke is exchequer secretary to the Treasury