20 November 2014

UK Government looks to refine Patent Box

The introduction of the Patent Box regime in April 2013 was welcomed by many businesses in the UK because it offers companies the possibility of reducing their UK corporation tax paid on profits made on the global sales of a patented invention from 23% down to 10%, when fully phased in. Accordingly, many businesses hope that this attractive tax regime will encourage investment in research and development in the UK.

However, the Patent Box regime has not been so warmly received in the rest of Europe.  In fact, Patent Box has created a long-running dispute with Germany, who led the charge in opposing the new UK tax regime arguing that Patent Box encouraged unfair tax competition across Europe. Their criticism was that the Patent Box allows businesses to qualify for the tax reduction even when their R&D takes place outside of the UK.

We can now report that the UK has reached an agreement with Germany to put forward a joint proposal to advance negotiations on new rules for preferential IP regimes which are currently being considered within the G20/OECD Base Erosion and Profit Shifting (BEPS) Project. If accepted, the new proposals, which would be introduced in June 2016, would limit the scope of the UK Patent Box regime, but which would run in parallel with the current tax regime until June 2021.

The new Patent Box system would be designed to ensure that the research and development leading to the patented product which qualifies for the tax break is carried out in the UK. This change does appear to be consistent with the initial spirit of the tax regime, and should continue to encourage investment in the technology sector within the UK.  The additional incentives to invest in research and development which result from the shake-up of the Patent Box regime could in fact be beneficial for domestic businesses.

It should be noted however that these new limitations, if introduced, will not affect businesses for a number of years.  So-called “grandfathering” provisions mean that companies will still be able to register patents under the existing Patent Box regime until June 2016.  Additionally, any products covered by patents registered under the current Patent Box regime will continue to qualify for the associated corporation tax break until June 2021.

Accordingly, businesses wishing to register their patents under the existing Patent Box system may need to consider filing patent applications before June 2016, as well as requesting expedited examination of their pending UK or European patent applications. This would increase the chances of obtaining granted patents quicker, so that the lower tax rate applies sooner, and before the possible 2021 expiry date when the current system may close.

We shall continue to monitor the situation regarding Patent Box, and will keep you abreast of any changes. If you have any questions about Patent Box, please contact your usual Venner Shipley adviser.