I was invited to attend a workshop last Thursday morning at the Treasury to discuss the Patent Box proposals.  We were treated to presentations from the Treasury and HMRC officials responsible for the detailed design of the scheme followed by a useful Q&A session.

There were no real surprises in what was said but, as we are in the middle of a consultation period, that in itself was hardly surprising.

Essentially, this regime is an attempt to provide the UK with something that will compete with the regimes in The Netherlands and Belgium, which provide (broadly) for reduced profits on patent profits.  The UK regime will look to tax qualifying patent profits at a reduced headline rate of 10% in an effort to encourage global business to maintain and develop patents in the UK.

I think this is a great idea that is possibly going to be let down by some disappointing weaknesses.

The first slightly disappointing issue is that this will pretty much only apply to patents (and other very similar IPR such as plant breeding rights and Supplementary Protection Certificates).  To be fair, I can see why the Government has taken this decision (it would simply be too costly otherwise) but it will leave a lot of people rather unhappy.

The other disappointing aspect is that, by the time one has been through the formulaic approach to calculating the qualifying patent profits that will fall into the box, not much of the overall profit actually gets there!  If we take an example of a company with 70% of its total income coming from the sale of qualifying patented products (Example A in the condoc), only 19.6% of its taxable profit goes into the Patent Box.

Furthermore, the effective tax saving is rather small.  Using the expected CT rate of 24% for 2013/14 (the year the Patent Box is to be introduced), the effective tax rate with the benefit of the Patent Box is 21.23%.  Given the fact that this company has 70% of its income arising from qualifying patents, without detailed knowledge of the way the regime reduces the profits qualifying for the box, it might reasonably expect its effective rate to be a little lower, at 14.2%.

As I say, I think the Patent Box is a great idea and long overdue.  My worry is that cost concerns are going to mean we get a damp squib of a regime that actually does little to encourage companies to develop and hold patents in the UK.

I am currently preparing my detailed response to the consultation, which I will publish in due course.  If you have an interest in this new regime, I would urge you to read the condoc and consider submitting a response.