The Patent Box regime introduced in April 2013 provides tax relief for UK companies exploiting certain qualifying patents. The regime effectively provides for a 10 per cent tax rate on qualifying profits derived from UK, EPO or many EEA national patents.
Contrary to reports elsewhere, not all European patents are eligible, for example French patents are excluded, presumably because France has a basic patent system which does not provide for patent examination. Thus it is very simple to gain patents in France, but they may have no validity. This would then allow abuse of the Patent Box relief. The list of eligible countries in on the HMRC Guidance page.
As we reported in November 2014 a dispute with Germany was resolved by agreeing to change the basis of the tax calculation to tie it more closely to research and innovation based in the country. Subsequently, the OECD named the Patent Box as a ‘harmful tax practice’ in its October 2015 BEPS report.
The original Patent Box legislation did not directly link the availability of the reduced rate to the research and development (R&D) carried out by the claimant in relation to the patented invention. Broadly, it was enough that the company ‘actively’ held the qualifying IP right.
Key changes
The Finance Act 2016 introduces a new regime to replace the existing regime. Under the ‘new’ regime, the profits of a particular ‘stream’ of IP subject to the reduced rate will decrease where the qualifying R&D sub-contracted to connected persons and other expenditure on qualifying IP rights is more than 30 per cent of the cost of R&D (including that subcontracted to third parties) contributed by the company claiming Patent Box treatment. This result is achieved by the introduction of a ‘nexus fraction’ and is clearly designed to stop multinational groups ‘moving’ overseas IP into the UK to benefit from the reduced tax rate.
This change is likely to reduce the benefit of the Patent Box where significant R&D is carried out by other group companies. Peculiarly, no distinction is made between UK and overseas group companies, meaning that many UK groups could be adversely affected unless they are able to reorganise their R&D activities.
The ‘new’ regime will also increase the administrative burden, as the calculation of qualifying profits, and the tracking of underlying R&D, will be more complex.
Timeline of changes
IP rights acquired from related parties on or after 2 January 2016 will in many cases be within the ‘new’ regime from 1 January 2017, but the ‘old’ regime will still apply until that date.
Other existing qualifying IP rights and patents pending as at 30 June 2016 are within the ‘old’ regime, provided a valid Patent Box election is made for an accounting period beginning before that date.
Patent applications made after 30 June 2016 are within the ‘new’ regime.
Companies first electing into the Patent Box for periods beginning on or after 1 July 2016 are within the ‘new’ regime. Normal time limits apply in relation to all such elections and these can be made retrospectively. The election does not need to have been made before 1 July 2016.
The ‘old’ regime closed on 30 June 2021, after which all Patent Box profits will fall within the ‘new’ regime. Prior to this date, companies can choose for the ‘new’ rules to apply to ‘old’ IP, but this is unlikely to be beneficial.
Actions
- Consider electing into the existing Patent Box regime where UK or European patents are already in place. For pre 1 July 2016 patent filings, you will usually have a choice of which regime to apply, although as noted above, the old regime will almost certainly be more beneficial.
- Consider making new patent applications. All those filed from now will be considered under the new regime only.
- Consider applying for UK or European patents, where overseas patents already exist – usually only available within a year of the overseas filing. If these overseas patent have a filing date before 1 July 2016, this can be claimed for your new UK or European filing.
- Review group arrangements with regard to holding and developing IP, to ensure future claims are maximised.
Obtaining patents for your IP may be quicker and less costly than you think. We can provide introductions to accountants we work with regularly and who are familiar with the Patent Box. They can ensure that your company meets the requirements of the regime appropriately and cost-effectively.