The Patent Box regime introduced in April 2013 provides tax relief for UK companies exploiting certain qualifying intellectual property (IP) rights. The regime effectively provides for a 10 per cent tax rate on qualifying profits derived from UK or EU patents.
The original Patent Box legislation did not directly link the availability of the reduced rate to the research and development (R&D) carried on by the claimant in relation to the patented invention. Broadly, it was enough that the company ‘actively’ held the qualifying IP right.
Because of this and the potential for abuse, the OECD named the Patent Box as a ‘harmful tax practice’ in its October 2015 BEPS report. In response, the UK government announced a consultation and in December 2015 draft legislation was published for inclusion in Finance Bill 2016.
The draft legislation introduces a ‘new’ regime to replace the ‘old’ regime, with effect from 1 July 2016.
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. Normal time limits apply in relation to all such elections.
- 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.
- The ‘old’ regime closes 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.
- Consider electing into the existing Patent Box regime where UK or European patents are already in place.
- Consider making new patent applications.
- Consider applying for UK or European patents, where overseas patents already exist.
- Where patents exist, but are held by non-UK group companies, consider whether the IP could be transferred to the UK before 30 June 2016.
- Review group arrangements with regard to holding and developing IP, to ensure future claims are maximised.
How can RSM help?
RSM is a leading professional services firm that has actively participated in the consultation process throughout the development of the Patent Box legislation. We are therefore ideally placed to help companies navigate the new rules, to assess whether they qualify for the Patent Box and, if so, to maximise the resulting tax savings.
Obtaining patents for your IP may be quicker and less costly than you think. We can provide introductions to patent attorneys 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.