The Patent Box: Still time to benefit

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We have written previously about the possible benefits for developers of the so-called Patent Box.  In a nutshell, the Patent Box enables companies with qualifying patents to tax the profits arising from those patents at a reduced corporation tax rate of 10 per cent.

Since its inception, however, the Patent Box has been subject to criticism. No less a critic than the chair of the parliamentary Public Accounts Committee suggested that the scheme was tax avoidance.  Further, the German Finance Minister maintained that it amounted to unfair competition, a position endorsed by the EU Code of Conduct Group which itself suggested that the Patent Box contravenes the code of conduct for business taxation.  The Patent Box has also been criticised simply for being too generous.

After initially rejecting the criticisms, the UK Government has now backed down. This year will see the introduction of legislation designed to ensure that the Patent Box is compatible with international rules.

The legislation will be contained in the Finance Bill 2016. Assuming the legislation is passed in the form anticipated, the position from 1 July 2016 will be as follows:

  • the R&D incurred in relation to the IP asset in respect of which relief is claimed must have been incurred in the UK.
  • the fraction of profits of a company eligible for the relief under the Patent Box in respect of an IP asset will depend upon the level of qualifying and non-qualifying expenditure incurred in respect of that asset. This will be called the “Nexus Fraction” and a formula has been devised to help with its calculation. From 1 July 2016, companies wanting to take advantage of the – modified – Patent Box regime will have to track the expenditure and income relating to each relevant product and patent.
  • the above rules will apply to “new entrants” to the Patent Box on or after 1 July (i.e. either an IP asset is owned or created on or after that date or an election is made into the regime on or after that date). For these purposes, an IP asset will be deemed to come into existence when the relevant application, such as a patent application, is filed. In this way, companies that file a patent before 1 July will be able to elect into the existing regime even though the patent may not actually be granted until after 1 July.
  • the “Nexus Fraction” will have to be applied across the board, irrespective of the date of entry into the Patent Box, from 1 July 2021.
  • Companies wishing to benefit from the more favourable regime that exists at present must therefore move quickly and ensure that applications are filed before 1 July.