The UK Patent Box enables companies to apply (subject to certain phasing-in rules) an effective 10% corporation tax rate to profits earned from its patented inventions. After initial announcements of a proposed tax break for intellectual property in 2009, the Patent Box finally came into effect on 1 April 2013. However, following a campaign led by Germany arguing that the UK scheme is unfairly competitive, the regime (which is still in its infancy) is already set on course to be transformed.
The Patent Box, in its current form, will be closed to companies that have not elected into it by June 2016, and will be closed altogether by June 2021. Companies could, therefore, still benefit from the tax break under the existing rules for a few more years, but must act swiftly if they have not yet elected into the scheme. Although a replacement scheme will likely be introduced, any new scheme will almost certainly have a narrower application.
About the Patent Box
The introduction of the Patent Box in the UK, which was designed both to boost R&D investment in the UK and to encourage UK companies to commercialise their R&D and resulting innovation, has been welcomed by many high-tech companies with a tax domicile in this country.
Although the UK is not alone in Europe in offering such a scheme, the UK scheme is in some respects more attractive. It applies to profits derived from the worldwide income arising from the exploitation of qualifying patents. To qualify, a patent must have been granted by an approved patent-granting body, including the UK Intellectual Property Office, the European Patent Office and the national patent office of certain designated European territories. However, income arising from the exploitation of a qualifying patent can take one of many forms: it includes income from the sale of the patent or an item incorporating it, worldwide licence fees and royalties from rights in relation to the patent that the company grants to others, income or gains from the sale or disposal of the patent, as well as amounts received from others accused of infringing the patent.
Importantly, companies are able to reap the benefits of the scheme whether the R&D underpinning the qualifying patent occurred in the UK or elsewhere. It is this aspect of the scheme that has generated the most controversy, and that has recently forced the UK government to agree to make changes to it.
Foreign opponents of the UK Patent Box (and other similar schemes operated elsewhere) have been arguing that it encourages the artificial shifting by companies of profits away from where the real economic activity takes place (i.e. where the R&D takes places) to the UK.
The UK government, which has been at the forefront of international attempts, through the Organisation for Economic Cooperation and Development (OECD), to stop harmful tax practices, ultimately struggled to defend the Patent Box against these allegations. It has, therefore, agreed with Germany to adopt a new tax break regime based on the location of the R&D expenditure incurred in developing the patent or any product incorporating the patented invention. Whilst the aim of this is to deter multinationals (whose R&D expenditure or part of it is located outside the UK) from moving their tax domicile to the UK, the details of how this will be applied in practice are yet to be agreed. In particular, concerns have been expressed about how to identify and calculate qualifying R&D expenditure where this expenditure is spread across multiple territories.
What is clear is that the existing regime will be closed to new entrants by June 2016, and will be abolished altogether by June 2021.