Just a little over a year from the Patent Box tax incentive being introduced in the UK, proposals to restrict the benefits that it provides are expected to be introduced with effect from 2016.
Current regime and objections
The current UK Patent Box effectively applies a 10% corporate tax rate on some of the profits that a company derives from patented inventions. It was introduced by the government to encourage innovation in the UK. As widely reported, however, it has been opposed by Germany and a number of other EU member states on the basis that it represents harmful tax competition, as it could potentially provide an incentive for profits to be artificially shifted to the UK from other tax jurisdictions in order to benefit from the reduced UK tax rate.
On 11 November, the UK and Germany agreed a compromise, proposing that preferential IP tax benefits should only be given where the patent can be linked to research and development expenditure incurred in that jurisdiction (known as the ‘modified nexus approach’). This proposal is part of the on going ‘base erosion and profit shifting’ project by the G20 and OECD. Under the proposals existing IP regimes, such as the UK Patent Box, would be closed to new entrants by June 2016 and abolished completely by June 2021, although they could be replaced with new schemes compliant with the proposed modified nexus approach.
It is anticipated that this proposal will be tabled for approval by the G20 and OECD at the beginning of 2015. It is recognised, however, that further work is required to finalise the proposals, which is targeted for the end of 2015.
An announcement by the Treasury has since been released. However, as this was published on the same day as the Autumn Statement announcements, it has been somewhat overshadowed. Nonetheless, the messages coming from the Treasury are positive and give an important steer on the Government’s thinking and plans in this regard, as can be seen from the below extract.
“The changes that the Government have secured to the original approach proposed by the OECD will protect the interests of the UK as an excellent location for technology based businesses by retaining a competitive Patent Box regime, which will now align benefits more closely to research and development activity carried out in the UK. As such, the Government are confident that the new regime will continue to incentivise innovation and its commercialisation in the UK.”
This is a watching brief at the moment; however some comfort can be taken in that it looks likely that some sort of Patent Box incentive should survive albeit in a modified, slightly more restricted form than the current scheme. It is anticipated that the majority of UK-based innovative companies should still be able to benefit from a new Patent Box regime in the future, providing the patent is tied to some underlying economic substance in the UK.
We will provide further details as and when they are released. However, if you have any questions in the meantime as to how this may impact you, please contact David Clift.