We welcome the new regime for patents, which is part of aiding the UK's research and development and wider scientific and technological skill base.

Industries that will benefit

The opportunity the consultation offers, to continue to review how the regime will encourage innovation across a range of sectors, is welcome. Different industries commercialise patents in different ways and recognition of the need to consider, for example, the timing of commercialisation of a patent vis-à-vis the timing of the grant of a patent, is welcome. Differences in the time taken from innovation to the grant of a patent, and in the time taken to commercialisation, across sectors could, without careful drafting of the legislation, lead to discrimination against certain sectors.

Thus patent filers will need to make sure during the consultation phase that HMRC understand their commercial issues. In some hi-tech sectors, for example, where technological advancement is swift and product life cycles short, 'patent pending' products are commercialised ie in advance of the grant of patents.

The new regime could also encourage some sectors to file more patent applications in the UK, eg where previously they relied on trade secrets, or published details of innovations in journals in order to make them unpatentable, or where a technology is first registered overseas. The announcement that the Government will consult on how the regime will apply to equivalent overseas patents held by UK companies and income from acquired patents is therefore welcome.

Enhancing UK competitiveness

The combination of the R&D tax relief system (giving enhanced tax deductions for R&D expenditure) and the patent box regime means innovative activity in the UK is in a highly favoured tax position compared to some other industries. However, it is intended to allow the UK to maintain international competitiveness as many Western European countries have their own regimes already in place. Indeed, the Belgian and Dutch regimes present precedent for the UK regime.

During the debate within the Office for Life Sciences (in which Deloitte was involved) it was clear that this would not be a regime that was applied to intellectual property in the wider sense but only to patent income. Many businesses have questioned why the patent box could not be widened to include other intellectual property, as is the case with the regime in the Netherlands. We expect the consultation on the patent box to be part of a wider debate on UK competitiveness, with the largest companies arguing that in a globalised world they can site research labs, manufacturing and intellectual property wherever is most competitive and stable.

Many large groups have established tax efficient intellectual property holding structures outside the UK and may need to reorganise in order to benefit from this measure. They will also want to factor in the latest proposals for controlled foreign companies reform in the UK in decisions as to restructuring.

Restricting the regime to patents where the R&D is done in the UK would be complex to administer and the extent to which the new regime will lead to more products being manufactured in the UK remains to be seen. Within the life sciences, GlaxoSmithKline was quick following the Pre-Budget Report 2009 to announce publicly that it was linking £500m of manufacturing plant investment in the UK to the new regime.

Given the new regime is intended to apply to income from 2013 to patents granted after legislation is passed in 2011, businesses should review their patent pipeline, consider how their activities may fall within the new regime and raise issues arising as part of the consultation during summer 2010.

Interaction with R&D tax relief

At the time of the Pre-Budget Report 2009, Stephen Timms wrote that 'The Government will consider carefully how to define and target the income receiving the reduced rate; consequential changes may be required to other relevant tax rules... striking a balance against the immediate Exchequer costs.'

We understand from subsequent discussion with HM Treasury that there is no intention to limit existing R&D relief.

Valuing patent income

Businesses derive value from patents in different ways, from licensing to third parties, through generating income on patented or patent pending products, to reducing their cost base using patented technologies. Valuing the income or deemed income within the regime will therefore be critical and the fact that the consultation will cover the identification and valuation of embedded patent income is therefore welcome.

Commercial complexities that the legislation will need to address include products comprising component parts relying on technologies developed at different times and partial upgrading of products reflecting patented or patent pending technology. Products may also contain value derived from other IP such as brand.

At the same time loss making UK biotech groups will need to understand how the effective 10% rate is to be achieved in order to determine the value of this measure to them. For example, the Belgian regime which is most comparable to this proposed UK regime provides a deemed deduction against patent income which cannot be carried forward and so is of limited benefit to many loss making companies.