Following the recent joint announcement from the UK and Germany on the patent box regime we’ve encountered clients who believe the UK patent box is to shut completely. By way of reassurance here’s a short piece from Richard Turner of FTI Consulting.
Given the recent announcements on the deal struck with Germany there has been some concern over the wellbeing of the only recently introduced UK patent box. It is true that the existing rules will be phased out. However, a new regime will be introduced which is likely to be similar to the existing regime in many ways.
The announcement by the UK and Germany makes reference to a “modified nexus approach” for IP regimes. Essentially under such an approach “substantial economic activities” need to be undertaken in the country in which the particular regime in question exists, “by requiring tax benefits to be connected directly to R&D expenditures”.
So, crudely, for a UK based company where the R&D occurs within the UK there is not likely to be much of a change when the new regime comes into effect (apart from possibly an added compliance burden – see below). For interested readers it is noted that the modified nexus approach has been put forward as part of Action 5 of the Base Erosion and Profit Shifting Project (BEPS).
In broad terms, patent box benefit will be reduced by a fraction determined by qualifying (good ‘in country’ R&D) over total R&D and any cost of acquisition of IP rights.
It is anticipated that the existing Patent Box regime will be closed to new entrants by June 2016 and will eventually be abolished by 2021. Organisations most likely to be impacted by the changes will be:
- Groups migrating to the UK
- Foreign headquartered groups licensing rights to a UK company to manufacture and distribute patent products
- UK companies acquiring IP rights
- UK companies outsourcing R&D to affiliated companies outside the UK (note: there would be no restriction for UK companies who outsource to 3rd parties)
This is certainly not the Death Knell of the patent box and some points to consider now are:
- The existing system will remain open to new entrants until June 2016. It may therefore be possible to opt into the existing rules before this date to obtain the benefits of the current regime until 2021. It is noted that it is possible to opt into the patent box regime on the basis of a pending patent application but relief will only be available once the patent grants.
- As far as the new regime is concerned, many companies are unlikely to be affected if all of their R&D has been and will be undertaken in the UK, although the compliance burden from having to track R&D expenditure is likely to increase. Companies in-licensing technology may see a reduced patent box benefit and this may result in a trend to corporate acquisition over licensing so that acquirers inherit the R&D history.
Richard Turner 4 December 2014
Richard Turner is Managing Director, Tax & Innovation at FTI’s London based European Tax Advisory Team. Richard can be contacted via his email: richard.turner @ fticonsulting.com