Over the past few months it has been apparent that several G20 countries, most notably Germany, were unhappy with a number of Patent Box regimes set up by national governments. The UK Patent Box had come under attack for its provision that allows companies to access the lower effective rates of UK corporation tax on profits derived from patents that were not developed in the UK.
Until now the UK Treasury has robustly defended the UK Patent Box so this statement has come as something of a surprise. However, it seems that the political difficulties of on the one hand opposing tax avoidance within the bigger picture of the BEPS project, while on the other offering tax incentives that other powerful nations view as abusive, left the UK Government in an awkward position.
So what does this mean for the UK Patent Box?
While the detail will still have to be worked out, the UK/German joint statement contains the following proposals:
- The current UK Patent Box will be closed to new entrants in June 2016 and abolished by June 2021. The implication is that a new, reformed UK Patent Box will be in place by June 2016 at the latest, based on the ‘Modified Nexus Approach’ which will only offer tax incentives where significant R&D is undertaken in the UK
- Companies already within the UK Patent Box can retain the benefits until June 2021
- There will be restrictions on qualifying expenditure for the UK Patent Box where R&D work is not undertaken by the claimant (but no clear details as yet as to the nature of the restriction)
- By June 2015 the OECD will provide guidelines on how to track and trace expenditure for Patent Box calculations
There are thus several positive messages to come out:
- There is now certainty that the UK Patent Box will continue in a modified format
- Companies already accessing the UK Patent Box will be able to remain within it for several years and plan ahead for the changes
- Given the UK’s commitment to the BEPS project this development is probably the best outcome that could have been hoped for, and given the support of Germany for the new development it is unlikely to face any further challenges
- No indication was given that the 10% rate of tax on profits derived from patents will be changed, just a narrowing of eligible expenditure, so it is still worth planning to take advantage of the low rate
- Supporting innovative companies undertaking R&D in the UK and creating skilled jobs is still a high priority for the UK Government. The continuing success of the R&D tax credit scheme, combined with the Patent Box, makes the UK a great place for innovative companies to do business.