On the eve of the recent G20 summit the UK and German governments released a statement. This1 has significant implications for the UK’s Patent Box tax regime. The statement, which undoubtedly represented something of a compromise, in the wake of objections from several countries, most notably Germany, was nevertheless defended by George Osborne in Parliament as “a great deal for Britain”. Such positive spin may seem at odds with an apparent “watering down” of a flagship policy; but it was not wholly unjustified: companies undertaking R&D in the UK will still be able to benefit from Patent Box tax incentives, even after the current regime is closed to new entrants in June 2016.
Why a compromise?
Over the past few months it has been apparent that several G20 countries, particularly Germany, were unhappy with a number of Patent Box regimes. These were set up by national governments to offer preferential rates of corporation tax on profits derived from IP, thus hoping to attract and create investment and jobs in hi-tech industries. 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 where the associated R&D activities were not undertaken in the UK.
Until now the UK Treasury has robustly defended the UK Patent Box. The statement from the UK government came 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 OECD’s “BEPS” (Base Erosion and Profit Shifting) project, and, on the other, offering tax incentives that other powerful nations view as abusive, left the UK Government in an awkward position.
What is being proposed?
The details will still have to be worked out. In the meantime, 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 OECD’s ‘Modified Nexus Approach’. This will only offer tax incentives where significant R&D is undertaken in the UK
- Companies already within the UK Patent Box can retain the current 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
A positive outlook?
Much of the UK press reporting of the UK/German statement has implied that it is wholly negative for the UK Government and, consequently, for innovative UK companies. The writers do not think, however, that this is the case at all, and there are 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. The support given by Germany for the new development means it is unlikely to face any further challenges.
- No indication was given that the 10% rate of tax on profits derived from patents will change; just a narrowing of eligible expenditure. So it is still worth planning to take advantage of the low rate of income tax.
- 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 (and the recent Autumn Statement revealed yet another increase in the rate of R&D tax credit available to SMEs2 ).
In summary, the recent developments should add certainty to the commitment of the UK Government to offer tax incentives to innovative companies that undertake R&D activities within the UK. This should be good for businesses (and still good for UK patents). There is also still time for companies to take advantage of the current Patent Box tax regime and the new scheme that ultimately replaces it should offer tax advantages for companies undertaking R&D in the UK. Patent attorneys can, therefore, continue to raise the possible tax advantages of the UK Patent Box to client companies as a consideration when deciding whether or not to file patent applications.
Source: Nick Braddon, Barker Bretell LLP
