Launched with much fanfare in 2013, Patent Box is a flagship Government policy to promote innovation in the UK economy. Patent Box permits eligible companies to reduce their headline corporation tax rate on worldwide profits derived from patents to 10%.
Following its launch, the policy ran into choppy international waters and criticism from foreign governments created uncertainty over the future of Patent Box, which has put many otherwise qualifying companies off from pursuing this tax relief.
In a concerted effort to be seen as a good global citizen, the UK Government has begun preparing the ground for future revisions to Patent Box which would be acceptable on the international stage and, most importantly, recent announcements have clarified the immediate future of Patent Box out to June 2021 which should allow companies to plan a patent box strategy with greater certainty.
This note considers the timing for companies to act in order to ensure that they are able to obtain the maximum benefit from this valuable relief.
Why has UK’s Patent Box been criticised?
Whilst the UK is not alone in offering “Patent Box” regimes, countries such as Spain, the Netherlands and Belgium have had such incentives for years, certain features of the UK’s implementation have been publicly criticised in the international arena.
One particular feature of the current Patent Box legislation (“Patent Box 1.0”) that has been unpopular with other Governments is that the rules do not require that the R&D expenditure leading to the invention or product take place in the UK. The implication of this for migration of international corporate groups has caused the most concern, particularly in light of the ongoing international efforts on the OECD’s “BEPS” (Base Erosion and Profit Sharing) Project.
Due for completion in 2015, the BEPS project aims to draw together an international coalition against the use of aggressive tax planning by multi-national corporations to shift profits to territories where there has been little or no economic activity. Governments of countries, such as Germany, have labelled UK Patent Box 1.0 as encouraging exactly the kind of behaviour that BEPS is trying to combat.
UK Government sets course for “Patent Box 2.0”
It appears that the UK Government has decided to compromise on certain parts of its Patent Box regime in the name of good international relations. In advance of the recent G20 summit in Brisbane on 15-16th November 2014, the German and UK Governments issued a joint proposal on certain ground-rules for preferential IP tax regimes, such as Patent Box.
This proposal will be moved forward via the OECD with a view to concluding detailed negotiations by June 2015.
What does this mean for Patent Box 1.0 in the meantime?
Whilst any uncertainty over fiscal policy is unwelcome, the announcement describes an orderly phasing out of Patent Box 1.0. The announcement states that:
- Patent Box 1.0 will remain open to companies who have already elected into the Patent Box regime;
- Patent Box 1.0 will remain open until June 2016 to other companies who wish to elect in;
- “Grandfathering” provisions will enable the benefits of the existing Patent Box 1.0 regime to be enjoyed until June 2021.
Will there be a new relief to replace Patent Box 1.0?
During this transitional period, we can expect a re-boot of Patent Box. Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... More have indicated that the negotiations for the new relief should be completed by June 2015. So, what will the new regime (“Patent Box 2.0”) look like?
At this stage, it appears that the main focus of the modifications to the UK Patent Box regime will be the introduction of the so-called “Modified Nexus Approach” based on the location of the R&D expenditure incurred in developing the patent or product.
The aim of the “Modified Nexus Approach” is to establish a connection between the R&D activity that gave rise to the patent or product and the country offering the beneficial tax regime.
It is of course possible that other changes may be introduced but no other significant developments are revealed in the announcement.
What does this all mean to UK businesses?
- Nothing in the announcement constitutes a change to the UK’s tax rule under the current Patent Box relief (Patent Box 1.0). For the time being, it is business as usual. However, the announcement does provide a clear “roadmap” for future reform.
- Patent Box 1.0 will be open for business and will remain open for new companies to elect into until 30th June 2016. Furthermore, Companies enjoying benefits under Patent Box 1.0 will continue to do so until 30th June 2021.
- UK Companies which have conducted their R&D and developed their patents or products in the UK, such as many SMEs, can expect that a new Patent Box regime (Patent Box 2.0) will continue to reward the risk they have taken in R&D with a corporation tax relief.
For eligible companies, time is now ticking in which to enjoy the potential benefits of Patent Box 1.0 and companies should consider whether they can legitimately reduce their corporation tax liability to a headline rate of 10% under the Patent Box 1.0 rules. There is now a deadline of 30th June 2016 in which to make that election in order to obtain the benefits through to 30th June 2021.
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