What is happening to the UK Patent Box? Is it doomed?

Ercan Demiralay FCCA explains how the Patent Box will change in the UK and what it means for your business following EU intervention.

For many businesses, being awarded a patent can be very advantageous. It helps prevent copying, keeps competitors at bay and provides licensing and other commercially advantageous options. If you've been granted a patent then you could be eligible for tax relief in the form of the Patent Box.

Should this be a possibility for your business, then you need to act fast and read on as the end of the Patent Box as we know it is coming soon. A new modified approach and regime will commence in June 2016, still benefiting businesses that innovate within the UK, but in a markedly different manner.

What is the Patent Box?

The Patent Box allows you to lower your corporation tax liability to 10% for all profits attributed to patents held in the UK and Europe. Your business may be covered if it is generating profits from patented products, services or processes, or receiving income from royalties. This scheme exists independently of the R&D tax relief scheme, meaning companies are able to benefit from both.

There are a number of considerations that have to be made when calculating how much of your income is eligible for the reduced tax rate. You may have a patent on the process for making a particular product which means you will only be eligible for the 10% rate for those particular parts of the product.

Do you qualify?

In order to qualify for the Patent Box your organisation must meet the below criteria.

Why the Patent Box was criticised?

Just a year after the initiative started, the European Commission questioned whether the Patent Box contradicted European State Aid regulations. State aid is an incentive granted by a national or local government to a company to encourage the development of business. To ensure fair competition across the EU, state aid is generally prohibited.

The EU was concerned that the Patent Box constituted as a harmful tax practice. The Germans in particular felt it enabled artificial shifting of profits between European countries. The UK is an avid promoter of preventing such practices through their work with the Organisation for Economic Co-operation and Development (OECD). The result was the UK treasury compromised. An amended regime will offer tax incentives for innovators but also discourages the practice of tax tourism.

What the new Patent Box looks like?

• The new system will only be available where significant R&D is carried out in the UK.
• Incentives will be based on a fraction of IP income equal to the ratio of qualifying research expenditure to aggregate expenditure required to innovate the intellectual product or process.
• There has to be a direct connection between the income receiving the benefit and the activity which results in that income.
• There will be a restriction on qualifying expenditure for the UK Patent Box where R&D work is not undertaken by the claimant.
• There will be a grandfathering period between regimes. This means the current system won’t close for new entrants until June 2016, and companies already elected into the regime by this date will be able to retain their benefits until final closure in June 2021.

What happens next?

Although the new Patent Box will focus more on incentivising R&D within the UK, it is said to still incentivise innovation and its commercialisation in the UK. The UK government will now legislate for the new Patent Box including anti- avoidance regulation and making provisions for the transition from the old to the new regime.

Businesses need to plan ahead. If your organisation is a current electee of the Patent Box come June 2021 it may be possible that you will then receive reduced tax benefits or none at all. You need to ensure this will not affect your financial security when the time comes.

The content of this post is up to date and relevant as at 26/10/2015.

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