The ‘new’ Patent Box regime – are you ready?

Gillian McColgan

Gillian McColgan

Tax Director

The Patent Box regime was introduced to encourage companies to develop and exploit patented technologies in the UK, and has been in place now for over 8 years.

The Government’s ambition with the Patent Box regime ultimately centres around economic growth in the UK: attracting investment; encouraging businesses to lay down roots (or discouraging them from diverting their profits overseas); and creating a highly skilled and high earning workforce in the UK.

How does the Patent Box do this?

In principle, the Patent Box reduces a company’s rate of Corporation Tax from the prevailing rate - currently 19% - to 10% on profits attributable to qualifying intellectual property rights (such as UK patents). It can represent a very significant tax saving, with the average claim for the financial year 2018/19 exceeding £800K, according to the most recently published official statistics. Therefore, to ensure the Government’s intended outcome is achieved, and to prevent abuse of the regime, the rules are detailed and prescriptive, and can quickly become very complex, depending on the claimant’s commercialisation model.

It's a relatively new regime, so why is it changing?

The UK is one of the 135 countries working with The Organisation for Economic Co-​operation and Development ("OECD") on the base erosion and profit shifting ("BEPS") project. This project seeks to achieve fairness and integrity in the differing tax systems across the world, and has encompassed a review of what are considered globally to be preferential tax regimes (including intellectual property ("IP") regimes).

As a result of findings announced by the OECD in 2015, the UK Government sought to address a perceived gap in the UK Patent Box rules. In essence, a new Research and Development ("R&D") fraction (also known as the Nexus fraction) was introduced in order to link the benefit of a company’s Patent Box claim to the underlying R&D activity undertaken in developing the intellectual property right.

What does this really mean?

For accounting periods beginning on or after (or straddling) 1 July 2021, all companies making Patent Box claims must calculate and apply the R&D fraction. In order to do so, companies must be able to ‘track and trace’ the history of their R&D expenditure, generally in relation to each of their qualifying IP rights. In situations where a claimant company has contracted out significant levels of R&D to a connected party and/or acquired the IP right itself (whether through outright purchase or by way of, for example, a licence agreement), the application of the fraction may result in a restricted Patent Box benefit.

Are these really new rules?

The R&D fraction was introduced on 1 July 2016 for all new claimant companies and for claims made in respect of ‘new’ IP. However, transitional provisions have been in place until now, meaning that companies that had already elected into the regime prior to July 2016 may not have yet had to apply the fraction.

What should I do now?

If your company has recently applied for or been granted a patent and you would like to discuss the potential benefits of the Patent Box in more detail, please get in touch with a member of our Innovation Taxes team or your usual JC contact. Similarly, if your company is already making Patent Box claims and you would like to understand the potential impact of the new rules on the level of tax saving (as well as the record keeping requirements), our team would be delighted to help.

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