UK government publishes draft legislation to drive innovation

The government is to publish draft legislation to introduce tax relief for innovative companies to help the UK retain businesses creating patents.

The government is to publish draft legislation introducing tax relief for highly innovative companies to help the UK retain businesses creating patents.

Patent Box, as the proposed legislation is known, was proposed in March and consulted on in May.

It proposes a 10% corporate tax rate for profits from patents and royalties. The government expects this to encourage UK businesses to retain high-value jobs associated with the commercialisation of patents and to invest further in innovation. The law could come into force in April 2013.

Jeremy Morton, a partner at law firm CMS Cameron McKenna, says the draft legislation brings the UK in line with other European countries, where similar systems have been in place for years. 

“Whilst such tax reliefs are welcomed to drive investment, innovation and growth in the UK technology and telecoms sectors, the proposals have not necessarily been developed with our sector in mind. For example, the draft legislation only offers relief on patents, not on copyrights or brands,” he added.

Morton says the Patent Box proposals are simplistic. “Companies will need to develop more sophisticated tax and transfer pricing structures to maximise the effect of the Patent Box. However, the implementation of such structures can take up to 18 months as board level decisions are needed. Companies will need to act now if they are to review their current structure and make changes before the law comes into force, to take full advantage of the rewards.”

Tax-friendly regions are attractive to IT start-ups. KPMG recently researched 95 cities in 10 countries to establish which is the best place for research and development. Australia was found to be the best country to carry out R&D, with Melbourne the best city in the world. "Melbourne's improvement was the result of the new tax credit," said David Gelb, senior partner for R&D at KPMG Australia.

Melbourne has risen to the top in the latest KPMG R&D report, from fifth place in 2008. Gelb  said Melbourne's fast improvement is the result of a new tax law which gives start-ups 45% of their investments back, even before they pay tax.

Melbourne accounts for 25% of Australia's total IT revenue, with 8,500 IT companies and 140,000 IT professionals, according to Australian government figures.

Gelb said Melbourne's success is the result of the Victoria State government's understanding of the importance of IT to the economy and its ability to create a tax policy that drives innovation.

As well as giving back 45 cents in every dollar spent by start-ups that have a turnover of less than A$20m, it has simplified the process of applying for credits. The best UK start-ups can get is 12% back before they pay tax and 26% if they are paying tax.

Read more on IT suppliers