Shutting the Patent Box
Download our latest Focus On Patent Box sheet here: http://www.macintyrehudson.co.uk/sites/www.macintyrehudson.co.uk/files/u140/focus_on_-_tax_-_changes_to_patent_box.pdf
Designed to promote and enhance the UK’s position as a world leader in patented technologies, encourage innovation and keep development, manufacture and exploitation in the UK; The Patent Box has been widely welcomed by the corporate world – especially in the manufacturing and technology sectors. GlaxoSmithKline attributed to the Patent Box its additional investment of £500 million in manufacturing in the UK, along with the creation of 1,000 new jobs and the construction of a new factory.
Since its introduction in 2013, Patent Box has been encouraging businesses to commercialise their patents and R&D in the UK to benefit from a lower rate of tax. It allows a 10% tax rate on profits derived from any products that incorporate patents, compared to the standard corporate tax rate of 20%.
However, internationally, the regime has not been quite so popular. It has been subject to intense scrutiny as to whether it may be considered a harmful tax measure under the EU Code of Conduct for business taxation. Germany (among others) accused the regime of promoting unfair (or) harmful trade competition by being excessively generous. It was further argued that the regime was encouraging companies to artificially shift their profits to the UK to the detriment of other EU members’ tax collections.
The main sticking points focused on two specific areas of the regime; the link between patent income and actual research activity undertaken in the UK (as it may be possible to claim patent box relief where the patents are held in the UK but the R&D is being carried out overseas); and allowances for income not directly linked to the patent (e.g. marketing costs on the final product) qualifying for the reduced rate of 10%.
The European Courts announced their ruling on the future of Patent Box in the UK in December 2014, following the European Commissions conclusion that parts of the UK patent box scheme did amount to ‘harmful tax competition’. The UK Treasury has subsequently issued a statement confirming that the current UK Patent Box regime will close to new entrants by 30 June 2016, with transitional arrangements for existing regimes until June 2021.
Due to these timing restrictions, it is anticipated that there will be a rush by companies to opt into the scheme prior to the 30th of June 2016 in order to avail of the more generous benefits, at least up to 2021.
The regime currently only applies to UK and European Patent Office patents, and those granted by certain European Economic Area countries. In addition to outright ownership, an exclusive licence over such patents also qualifies.
The company must meet two other conditions:
- The Development condition, i.e. the company (or another group company) has been involved in the innovation behind the patent.
- The Active Ownership condition. If the company does not meet the development condition (i.e. because that condition has been met by another member of the group) it must actively manage the patents e.g. formulate plans and make decisions around exploitation.
The Patent Box currently includes income from any patents, whether developed by the company, or licensed in (as long as the two conditions above are met) and there is no need for the IP behind the patent to have been developed in the UK. However, from April 2016 this is to change and for any new entrants into Patent Box, the R&D work leading to the patent will also need to have taken place in the UK.
Until that point it will be possible to continue to elect into the regime with non UK development and as long as the company has elected in for a period commencing prior to 1 April 2016, the old rules will continue to apply until April 2021.
The usual time limit for electing into the regime is two years from the end of the accounting period and this will continue to apply.
We recommended you take professional advice particularly in the areas of:
- Maximising qualifying income to be taxed at 10%
- Advice on methods of income identification and tracking
- Maximising claims for R&D related costs
- Applying transfer pricing methodologies to value notional royalties and the notional marketing royalty
- Optimising group IP holding structures and licences.
If you would like to know more about Patent Box please contact our manufacturing specialists: