Patent Box

Where are we after the Autumn Statement?

With newspaper headlines variously describing Patent Box as dead, alive or in a state of limbo between this world and the next, technology-based businesses may have been scouring this weeks Autumn Statement for some official pronouncement on its fate. Certainly the plot has taken various twists and turns in recent months but, whilst the Chancellor omitted any mention of Patent Box in his Autumn Statement, there was an important development this week which provides a welcome update and clarity for business.

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 over its potential applications to multi-national corporations created uncertainty over the future of Patent Box, which has unfortunately put many otherwise qualifying companies off from pursuing this innovative tax relief.

Whilst the Chancellor passed up the opportunity to clarify the position in the Autumn Statement, an important announcement was made by the Financial Secretary to HM Treasury, David Gauke MP, in a House of Commons Written Statement on 2nd December 2014 on the eve of the Autumn Statement.

In his statement, Mr Gauke confirms that the joint UK/German proposal which issued on 11th November 2014 has now received broad international support from the OECD Forum on Harmful Tax Practices (FHTP) and the EU Member States Code of Conduct Group at their respective meetings after the latest G20 summit. The next step is that the FHTP will work up the detail of the new rules and then the Government has said it intends to consult on the proposed changes during 2015, with the new rules likely to come into force with effect from July 2016.

This clear intent to legislate on the basis of the UK/German proposal, has several important consequences for UK companies with patents and related rights :

  1. Companies who have already elected into the Patent Box regime will continue to receive its benefits until June 2021;
  2. Companies eligible for the current Patent Box regime need to bring forward their planning and assessment of the potential benefits as the lid on the existing generous Patent Box relief will be slammed shut to new claimants in June 2016;
  3. “Grandfathering” provisions will enable the benefits of the existing Patent Box regime to be enjoyed until June 2021.
  4. A new Patent Box regime is set to take effect from July 2016. Whilst the new rules will need to be assessed in due course, the stated intention is to introduce a “modified nexus approach” to the new Patent Box requiring that the R&D activity occurs in the UK.

The take away message is that, for eligible companies, time is now ticking in which to enjoy the potentially considerable benefits of Patent Box in its current form.

In the longer term, it certainly now looks as though preferential IP tax regimes will be adopted on an international and EU basis and we can expect a replacement relief which should still “tick the box” of providing UK businesses with a tax relief to reward their investment in new innovation in the UK, which after all was the stated intent of the original policy.

For more information, regarding Patent Box, its application to your business and the implications of the proposed changes please contact Gillian Abramson.