The current government is keeping its promise, first announced under the Labour regime in December 2009, to encourage investment in innovation in the UK by providing a reduced 10% rate of corporation tax rate for profits arising from patents. The new scheme is due to come into effect from 1 April 2013 and has been welcomed by industry.

The next six months will be a crucial time as the government works out the details of how this "patent box" scheme will actually work. A consultation document will be published in May 2011 and followed by draft legislation in autumn 2011.

Associate Laura Ramsay comments: "I would encourage all UK businesses involved in R&D, innovation and IP transactions to take an interest in the consultation process and submit their views. A number of important questions will need to be addressed, such as how the income derived from patents is to be identified and assessed for the purposes of the proposed tax relief? Whereas licensing deals might simplify such an assessment, it may be difficult to quantify e.g. how much of a company's revenue can be attributed to the fact that its product or manufacturing process is patented."

"There are still many gaps in the loose patent box proposal that need to be filled in by the legislation. For example, it is not yet clear whether this tax regime will only apply to UK patents or also to non-UK patents held by UK companies. For many businesses the domestic market is of relatively low value - some companies do not even include the UK in their standard patent filing strategy. It also needs to be decided whether the system will be limited to granted patents or will also include patent applications. After all, the jobs and R&D that the government intends to protect are generally tied more closely with new patent filings than the number of patents that go through to grant. For many businesses involved in innovation, including the commercialisation arms of UK universities, a typical strategy is to develop a technology through its early stages but then sell or license its (usually still pending) patent rights to a bigger entity that can take the project to market. Again, if the legislation cannot extend the patent box to these situations then many of its targets for growth may not receive the boost that they have been promised."

Patent owners can contact Dehns to discuss how to take advantage of these tax proposals. We will report further on the new legislation once its details have been settled.