Planning for Intellectual Property Income
Patent Box Regimes
UK Patent Box tax incentive scheme
As has been widely reported, the UK and Germany agreed at the end of 2014 to change the UK Patent Box tax incentive scheme. This is not the end of the Patent Box – under the current proposals the Patent Box regime will in fact remain in place until at least June 2021 for current beneficiaries. From June 2016 it is expected that a new beneficial tax incentive agreed on by all EU member states will be implemented, so UK businesses should continue to be able to benefit from patent-related tax relief.
The UK Patent Box scheme came into force in April 2013, and effectively reduces the corporate tax rate on profits that a company derives from patented inventions down as far as 10%. The scheme has attracted opposition from a number of EU member states, in particular from Germany, on the basis that it could potentially provide an incentive for profits to be shifted artificially to the UK from other countries in order to benefit from the reduced tax rate.
This would represent a breach of EU rules on tax competition. Changes to the UK Patent Box regime have therefore been announced, although more detail is still awaited.
The Patent Box is still available till June 2016.
Under the proposals it is anticipated that the current UK Patent Box will be closed to new entrants in June 2016. Up until this date you can still elect into the Patent Box to benefit from a reduced tax rate; Patent Box benefit to continue until June 2021.
Whilst it is proposed to close the Patent Box to new entrants in June 2016, anyone who has elected into the Patent Box prior to that date should continue to benefit from the reduced tax rate offered by the scheme until June 2021.
The Son of Patent Box
The proposals indicate that a new scheme will be introduced, probably in June 2016, to run in parallel to the current scheme. The treasury released a statement indicating that “the Government are confident that the new regime will continue to incentivise innovation and its commercialisation in the UK.” It is likely that the new scheme will only be open to companies that carry out a minimum of R&D in the UK.
The principal objective is to establish the requirement for substantial economic activities to be undertaken in the jurisdiction in which a preferential regime exists, by requiring tax benefits to be connected directly to R&D expenditures. In broad terms patent box benefit will be reduced by a fraction determined by qualifying (good ‘in country’ R&D) over total R&D and any cost of acquisition of IP rights.