Patent office, London. Courtesy. Corporation tax is currently 26% of profits, following a reduction in April from the previous rate of 28%.

"The aim is to provide  additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products," says the Treasury's Patent Box consultation paper.

The Government reports Pinsett Mason  is proposing to include income from the sale of patents in the Patent Box. Patents sold by UK businesses may be commercialised offshore, but the aim of the Patent Box is to encourage both the development and commercialisation of new patented technologies.

Some smaller companies which develop new patents do not have the operational scale required to commercialise a new product in-house. Extending the Patent Box to include income from the sale of patents will provide an incentive for these innovative small companies to locate in the UK.

The Government welcomes views on the two dozen issues raised, (listed below) in particular on the workability of the proposals in enabling companies to compute profits eligible for the lower Patent Box rate and the expected economic and administrative impacts of the proposals on businesses

Computational method
The Government proposes to implement the 10% Patent Box rate by allowing companies to claim an additional Patent Box tax deduction when calculating the level of taxable profits.

The resulting reduced profits will then be taxed at the normal rate of corporation tax. This deduction will give the same tax result as direct application of the 10% rate. The Patent Box tax deduction will therefore be calculated asQuestion 1: Will the requirement for a patent granted by the IPO or EPO cause significant commercial distortion? Do you believe that patents granted by any other EU national patent offices should be included, and if so which jurisdictions

Question 2: Do the ownership criteria adequately permit on-licensed patents and patents developed or commercialised in commercial cost sharing, partnership and joint venture arrangements to qualify for the Patent Box?

Question 3: Do businesses think that the development criteria are workable or are there commercial situations which should be included but would fall outside these rules?

Question 4: Do businesses believe that it is necessary to set out rules to more closely define the circumstances where a composite tangible or intangible product should be considered a single functionally interdependent item? Or can this requirement be tested through a motive test on a case-by-case basis?

Question 5: The Government would welcome views on how the arm’s length profit attributable to patents used in processes or to provide services should be calculated.

Question 6: Do businesses think that the proposed claim of retrospective benefits for the period while a patent is pending is fair and workable?

Question 7: Do businesses agree that the proposed model will produce an acceptable result in most circumstances, given the flexibility provided by the ability to apply the model to company divisions separately if required?

Question 8: Is there any alternative basis of apportioning residual profits between different products which is more appropriate without introducing excessive complexity?

Question 9: Should there be special rules for any one-off items of income or expenditure? If so what form should the rules take?

Question 10+: Is divisionalisation the most effective and least burdensome way to deal with a wide range of situations in which pro-rata allocation of profits and expenses would produce an inappropriate result?
Are the conditions set out above to govern the use of divisionalisation appropriate?

The Government would welcome any alternative suggestions, and would appreciate sufficient detail that these can be evaluated by HMT and HMRC.

Question 11: Are there any other circumstances in which divisionalisation should be mandatory?

Question 12: The Government would welcome views and evidence on the appropriateness of step 2 in identifying residual profits, as well as on how outsourced functions should be defined and whether there are any other costs which should be excluded from the mark-up.

Question13: The Government would welcome business’ views on an appropriate formula to allocate residual profit to patents, and on what types of expenses should be taken into account in calculating the relative contribution made by the patent and brand to the residual profit.

Question 14: Can businesses suggest any alternative ways of effectively separating patent profits from those arising from other types of IP? If a relative contribution approach is chosen, is the proposed safe harbour set at an appropriate level to simplify smaller claims?

Question 15: Are the proposed rules for the carry-forward of Patent Box losses appropriate? Should Patent Box losses also have to be set against Patent Box profits of other group companies in the same accounting period, in order to achieve a symmetrical treatment of Patent Box profits and losses?

Question 16: Do businesses consider that taking pre-commercialisation expenses into account in these circumstances is proportionate and fair, or are there better ways of ensuring that the benefit accrues to total net patent profits?

Question 17: Do respondents see any practical or technical problems with the approach of implementing the 10% Patent Box rate through a computational tax deduction?

Question 18: Do respondents have any initial comments about interaction with double tax relief rules or have any views on the Government’s stated aims for giving relief?

Question 19: Would having to comply with transfer pricing rules for transactions with associated companies in cases of tax avoidance be an unreasonable burden for smaller companies?

Question 20: Can respondents suggest any alternative ways to prevent artificial tax avoidance abuse of the Patent Box?

Question 21: Do respondents consider that other aspects of the formula apart from divisionalisation and step 3 will give rise to clearance applications? Will the current non-statutory clearance system be sufficient to respond to the range of enquiries that the Patent Box is likely to generate?

Question 22: The replacement of a cut-off date with a phase-in approach will have different effects for each company. The Government would welcome comments on the impact of this proposal on different sectors as well as views on whether businesses prefer a cut-off date as originally announced, or would favour the phase-in approach.

Question 23: The Government would welcome comments or evidence to support the assessment of the impacts of the regime.

Question 24: The Government would welcome comments on the best forum for dealing with emerging issues once the Patent Box is introduced