The Patent Box is a tax relief which was introduced by the UK Government in April 2013 which offers companies reduced tax rates on profits from products and services covered by patents, in order to recognise innovation in business.
Initially the Patent Box reduced the rate of corporation tax for a portion of the patent profits to 14% for the 2013 tax year. The rate was then reduced by a further 1% each year to the current rate of 10% (as of on 1 April 2017).
The exact calculations to determine the reduction in tax can be complex. In essence, to calculate Patent Box reduction in corporation tax, accountants calculate ‘patent related’ profit, which is the profit relating to products or services covered by a granted patent in a qualifying jurisdiction. From this ‘patent related’ profit, they deduct a routine or expected profit (i.e. if no patents existed) and then deduct the brand value (i.e. any profit attributable to your brand alone). This will result in an amount on which only a reduced corporation tax rate is payable. The Government’s intention is that, as of 2017, non-‘patent related’ profit is taxed at 20% while ‘patent related’ profit is taxed at 10%.
To qualify for Patent Box, a company must have made a significant contribution to either the creation or development of the patented invention or a product incorporating the patented invention. The patent must have been granted by the European Patent Office (EPO), UK Intellectual Property Office (UKIPO), or one of 13 EU states.
Companies will also qualify if the patent has been in-licensed on an exclusive basis. The Patent Box also incorporates patents which are pending, with the benefits accumulating for up to six years until the year of grant.
The UK and German governments have jointly announced that they have reached agreement on a proposal regarding the treatment of IP regimes. This proposal will then be put forward to other members of the OECD’s Forum on Harmful Tax Practices when they meet.
HM Treasury has advised that the UK Government would consult with businesses on the detailed proposals before implementing any changes.
The Mathys & Squire team is highly experienced with helping clients obtain and maximise the potential tax savings that are available through the Patent Box scheme. We can file patent applications solely for the purpose of enabling Patent Box tax relief to be claimed, and have done so for many of our clients. In this scenario, we will prepare a patent application which is narrower in scope in order to minimise the costs and timescale associated with obtaining a granted patent. Where needed, we can also help with identifying innovations which are suitable for patent protection and which cover commercial products or processes.
The adoption of a ‘modified Nexus approach’ which would mean R&D activity has to take place in the UK in order for the company to receive the maximum benefits of the regime. The proposal includes a concession allowing up to 30% of R&D to be outsourced to related parties (there remains no restriction on outsourcing to third parties).
Grandfathering rules – the current Patent Box regime will be open to new IP until 30 June 2016, and will continue to operate until 2021, (an election into the current regime can be made at any point for periods up to 2021 and this will apply to pre-June 2016 IP, the precise definition of which is to be agreed).
A new regime incorporating the ‘modified Nexus approach’ will commence in 2016 with the current and new regimes running in parallel until June 2021.
The proposal is subject to reaching agreement on suitable transitional arrangements from the current to the new regime. An important element of this is agreeing suitable tracking and tracing rules under the ‘modified Nexus approach’ to avoid disproportionate complexity and compliance burdens for business requiring R&D expenditure to be tracked for up to 20 years or more. These rules will need to be agreed with the other OECD members by mid-2015, in order to comply with the BEPS timetable.
The proposal would apply to all IP regimes, not just the UK Patent Box. We understand that the type of IP that can qualify will be limited so that only patents and similar IP, as is the case with the UK Patent Box, will qualify. The proposal would need to be accepted by the members of the OECD Forum on Harmful Tax Practices in order for it to be taken forward. Further discussions regarding the detailed rules, and how they will be implemented, are then expected to take place.
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