Patent box update

The UK tax relief environment has to change as a result of OECD pressure to tighten the rules, so the Treasury now plans to withdraw Patent Box relief, albeit over time.

The outcome is likely to be that patent income received by a UK resident company would only qualify for patent box relief if it is directly linked to R&D expenditure incurred by a company with ‘substantial economic activities’ in the UK.

It may be possible for R&D work to be carried out overseas, as long as a UK resident trading company pays for it (subject to some anti-avoidance on connected parties).

The proposals envisage that the current regime will end in June 2016 for new entrants, although businesses with existing qualifying patents or products should be able to retain the tax benefits until June 2021.  Structures that involve patents which do not meet the proposed new requirements are unlikely to continue to qualify for relief after June 2021.  Profits derived from patents granted or commercialised after June 2016 will only benefit from the (new) patent box scheme if the R&D to develop the product was incurred by a company that genuinely trades in the UK.

The existing tests which require the company claiming a deduction to have made a significant contribution to the creation or development of the patented item or a product incorporating the patented item will remain.

One key challenge under the new rules will be tracking R&D expenditure related to patents.  It can take years to develop a product, with different projects contributing to the final application.  Companies may, therefore, need to start tracking expenditure and may even have to reorganise R&D work across a group to ensure that the appropriate expenditure is incurred by the UK trading entity that will be the patent owner.

The UK government is committed to making the patent box incentive work with the necessary modifications and there is still a lot of work to be done on the practical implementation of the proposed changes.