Patent Boxing not so clever

05 October 2015

Rebecca Reading 

The UK Patent Box – a tax relief available to companies that patent inventions - has been confirmed as a Harmful Tax Practice by the OECD. Sad news in a way for a key part of the Government’s strategy to make the UK the most attractive tax jurisdiction in the G20, but perhaps not that surprising that it’s headed for a revamp, given it has come in for some serious criticism.

This preferential regime allows access to a beneficial 10 per cent effective corporation tax rate, but it isn’t the low 10 per cent rate in itself that’s the problem. The issue, according to the OECD, is that the tax benefits are not sufficiently linked to the existence of substantial activity. Or in other words, the OECD says that in order to access the low tax rate you need to do something to deserve it – in this case it would be the underlying R&D. Without this requirement, the regime is open to abuse by way of artificial structuring. In future, the OECD says that such tax breaks must be more closely linked to the R&D activities that lead to intellectual property creation.

The UK Patent Box hasn’t been singled out, though. Forty-three preferential regimes were reviewed, including 16 for intellectual property. All 16 were found to be harmful. The countries involved will all have to make amendments, to make sure that the regimes meet what we might call the golden rule of the BEPS project: to realign profits with value creation.

It seems a pity that a new set of tax rules, barely two years old, is going to be rewritten just when taxpayers are getting into using them. Our experience working with companies is that the Patent Box doesn’t seem to give benefits that are artificially high or in cases where there is no genuine innovation. With the UK being at the forefront of BEPS generally, we can expect to see a new and improved Patent Box regime sooner rather than later.