The patent box, which will afford companies the chance to apply a 10% corporate tax rate to all profits derived from qualifying patents from April 2013, was among a series of draft legislation announced on Tuesday.
David Gauke, Exchequer Secretary to the Treasury, expects the measure to benefit a wide range of companies which receive patent royalties, sell patented products, or use patented processes as part of their business.
"We have focused on patents, rather than other forms of IP like brands, trade marks and copyright, because they have a particularly strong link to high-tech R&D and manufacturing activity, are highly mobile and are legally defined and protected," Gauke told Managing IP.
"However, we intend to extend the patent box to all qualifying patents and associated rights, and not just to patents first commercialised after November 29 2010 as originally proposed."
The draft legislation reveals the regime will also apply to other qualifying IP rights such as regulatory data protection, supplementary protection certificates and plant variety rights.
GlaxoSmithKline (GSK), which consulted with the government on the patent box, was particularly effusive, describing the measure as "bold and forward thinking".
"When implemented, the patent box has the potential to transform the way in which the UK is viewed by companies such as GSK as a location for new investments in high added-value R&D and manufacturing," said CEO Andrew Witty.
A spokeswoman for the company confirmed that the patent box has ensured that the UK will be chosen as the location of its next biopharmaceutical manufacturing plant.
NARROW AND COMPLICATED
Others remain more cautious, though.
"We will be testing the draft legislation against the benchmark of increasing UK competitiveness in terms of attracting a greater share of global IP investment into the UK," said Ian Brimicombe, head of group tax and treasury at AstraZeneca.
However, given the limited scope of the patent box and its complexity in relation to competing incentives from countries such as Belgium, Luxembourg and the Netherlands, this is far from assured.
Kevin Hindley, a managing director at Alvarez & Marsal – Taxand, was disappointed by the final proposals. "The government hasn't dealt with the mindboggling complexity issues," he said. "And the narrow base means that pharmaceutical and high-tech companies will be happy, but most others won't benefit from it."
In particular, Hindley is concerned that it is difficult to determine what exactly the 10% rate will apply to.
He believes that the UK's initiative compares poorly with the regimes in Belgium, Luxembourg and the Netherlands and that it will not attract investment away from these countries.
The government's stated policy objective in implementing the patent box is to provide an additional incentive for companies to retain and commercialise existing patents and to develop new innovative patented products.
"This will 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," the Treasury says.
Hindley points out that while large pharmaceutical companies already located in the UK will benefit, the measure will not attract companies which would not already be looking to come to the UK for commercial reasons.
"This measure is about appeasing large companies thinking of moving, not attracting investment," said Hindley. "The government should have done something like Luxembourg, which has a simpler regime with a wider base."
HOW TO BENEFIT FROM THE NEW RULES
Despite the complexities, tax and IP lawyers said the patent box offers more benefits than the first proposal.
It specifically includes SPCs, plant variety rights and data exclusivity as well as patents. It applies to revenues for up to six years before grant, rather than four years. And the Treasury has said that patents granted by the UK IPO as well as the EPO, and possibly in other countries, are eligible.
"It was good to see that patents from the EPC-contracting states will be included," said Gerry Kamstra, IP partner at Bird & Bird. "But I see no reason why other, international patents weren't included as well. If the Treasury was concerned about business method patents – as was indicated – they could have required that any qualifying patent have a corresponding patent in Europe."
The patent box will also apply to products derived from a patented process, and in the case of complex products it will be possible to apply it to the income related to the patented item.
Miranda Cass, a tax partner at Bristows, said that although the rules are complicated, they are set out clearly in a formulaic way: "It shouldn't be that difficult for smaller firms of accountants or in-house tax teams to calculate."
The tax benefit is likely to be of most value to multinationals that own lots of patents and related rights, or small companies such as biotech start-ups who have one or two very valuable patents.
Mathew Oliver, a tax partner at Bird & Bird, said that the complexity of the proposals means it is hard to know immediately how they will affect multinationals: "The impact doesn't jump off the page. It will take a few weeks of companies doing the calculations on how exactly they can benefit, and how organisationally they make sure they sit firmly in the box, before we know specifics."
He also pointed out that the patent box should be considered together with legislation that was released at the same time on taxing the foreign subsidiaries of UK companies. This is the "stick to the patent box's carrot". These new rules should make it easier for companies to manage IP rights abroad, however, as it clarifies that UK tax does not have to be paid if the IP concerned is associated with foreign R&D or real trade abroad.
Gerry Kamstra, meanwhile, points out that there is an error in the proposed legislation. In paragraph 3.1 of the Treasury order it specifies that it covers regulatory data protection conferred by virtue of national marketing authorisation, but doesn't mention central Europe authorisation from the European Medecines Agency. "We're assuming, or certainly hoping, that this will be changed," says Kamstra.
