Finance Act 2012 introduced the UK Patent Box whereby, for accounting periods beginning on or after 1 April 2013, a company may elect for so much of its profits as arise from the exploitation of relevant patents to be brought within the new tax regime which, in broad terms, aims to reduce the effective rate of corporation tax on such profits to 10%.
The UK Patent Box has met with significant opposition from many other States, including Germany. The UK Patent Box also threatened to become a significant obstacle to the international political consensus that is required to pursue the OECD Base Erosion and Profit Shifting (BEPS) project which project aims, by December 2015, to come up with a series of proposals for significant reform of the international tax rules.
Against this background, and following discussions between the UK and Germany, on 11 November 2014, HM Treasury announced that the current UK Patent Box will be closed. Further entrants to the UK Patent Box will be barred from June 2016 and, after allowing for a five year transition period for companies already within the UK Patent Box regime, all tax benefits from the existing tax regime will cease to be available in June 2021.
As part of the OECD / BEPS project, there will be ongoing discussions that seek to reach consensus amongst G20 and OECD countries concerning a new preferential tax regime for intellectual property. The joint proposal for a new tax regime is to be considered by the OECD Forum on Harmful Tax Practices.
There are several critical issues concerning the design of the new tax regime that will need to be resolved in order arrive at a new tax regime that is workable for companies, workable for tax authorities and which also achieves the all-important international political consensus. However, the aim is to reach agreement during 2015 as part of the OECD / BEPS project. Only after that agreement is reached will the UK be able to introduce a replacement, new UK Patent Box that is compliant with the new rules.
The main restriction on any new UK Patent Box compared to the current UK Patent Box is that tax relief under the new regime will require that substantial R&D activity is undertaken in the UK, with the amount of UK tax relief limited by reference to the amount of expenditure incurred on UK R&D. There is currently very little detail available, but the Treasury announcement of 11 November suggests that, in addition to the R&D expenditure which a company itself incurs, there could be a formula which would permit, to a limited extent, related party outsourcing or acquisition costs to be included within qualifying expenditure.
For companies that have elected into the UK Patent Box or intend to do so, the window of opportunity to benefit from this tax regime is now time limited (see above). However, it is to be hoped that the UK, together with Germany and other G20 and OECD countries, will be able to agree a new preferential tax regime for intellectual property that will continue to provide support and encouragement to companies that undertake R&D and exploit patents.
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