RSM raises concerns that new Patent Box rules could have detrimental effect on UK companies

RSM has raised concerns that proposed changes to the Patent Box regime could have a detrimental effect on companies that develop and exploit intellectual property (IP) in the UK – especially in the hi-tech sector – with a particular impact on small and fledgling companies.

The Patent Box regime was introduced to incentivise the development of new and existing patents in the UK, and allows companies to apply a lower rate of corporation tax to profits earned.

However, following the publication of the OECD’s final Base Erosion and Profit Shifting (BEPS) action plan for reforming the international tax system last October, the Patent Box regime was confirmed as a ‘harmful tax practice’. As a result, the Government has been consulting on new measures to ensure it is consistent with the new international framework for preferential IP regimes as set out by the OECD.

The main proposed change is the introduction of the ‘nexus fraction’, meaning companies would only be eligible to claim Patent Box treatment on the portion of income resulting from R&D carried out exclusively by them to develop qualifying IP. But in its response to the consultation, RSM has raised concerns that companies would now be ‘penalised’ if they sub-contract that work to a related company, even if that company is based in the UK or is the most appropriate sub-contractor to carry out the R&D work.

George Bull, RSM’s Senior Tax Partner, said:

‘Although we recognise the need to introduce serious measures to address the issue of international tax avoidance, we are concerned that these latest proposals for changes to the Patent Box regime will have wider implications for smaller, innovative businesses in the UK – the very same businesses that the Chancellor wanted to incentivise by making the UK the ‘most competitive tax environment in the G20’.

‘Effectively penalising businesses wanting to use related sub-contractors for legitimate commercial reasons will restrict their development activities and also create a more onerous administration system, meaning that UK companies – and in particular high-tech businesses and developers - will suffer additional costs just so that the Patent Box regime can meet the OECD’s proposals.

‘It’s clear that these proposals have been introduced to clamp down on the large multinationals using the tax system to their advantage, but it seems that the UK government may be using a sledgehammer to crack a nut in this case.’

More details of the consultation are available on the HMRC website.