International concern about
aggressive tax practices in general
and the UK’s Patent Box regime
in particular forced the UK
Government to reassess the Patent
Box scheme, and this culminated
in a joint Germany-UK statement
in November 2014, about the
future of such preferential regimes
for intellectual property. In that
statement it was announced that
existing schemes, including the UK’s,
would be closed to new entrants by
the end of June 2016, and would be
closed entirely by 30 June 2021. It
was also announced that any new
preferential regimes would have
to follow the so-called ‘modified
nexus approach’, which requires
substantial economic activity to
be undertaken in the country in
which the preferential regime
exists, so that tax benefits are
connected directly to research and
development expenditure.
One positive development for all UK
businesses was the announcement
in the Chancellor’s July 2015 Budget
that the rate of Corporation Tax will
drop from the current 20% rate to
19% in 2017 and to 18% in 2020.
This drop in the underlying rate of
Corporation Tax will be a welcome
fillip to business, but also has the
effect of clipping the tax advantage
of the Patent Box.
In the meantime, interest in Patent
Box has spread to the US, where
Congress has been debating
implementation of a Patent Box
scheme there. Notably, the proposal
gained the support of the Chairman
of the House Ways and Means
Committee. A new regime has also
been introduced in Italy recently.
In terms of the future of the
UK Patent Box, very little has
happened since November 2014,
which has left some UK businesses
with questions about the future
of their tax planning. Due to the
general election in the first half
of 2015, no developments were
expected, in any case, until the new
government had settled in. We are
now awaiting the conclusions of
an international group called the
Forum on Harmful Tax Practices,
which is deliberating acceptable
preferential IP tax regimes. Once
that group has concluded its work
the UK Government will commence
a consultation on proposed changes
to the current Patent Box scheme.
So what do we expect the new
regime to look like? Under the
modified nexus approach, if a UK
business is undertaking the bulk
of its R&D activities in the UK we
do not expect the new regime
(“Patent Box II”) to look significantly
different to the current regime,
since in such cases the economic tax
benefit will indeed follow the R&D
expenditure. Conversely, companies
which undertake most of their R&D
expenditure outside the UK will no
longer be able to shift their tax base
to the UK.
Since there is no legislation on the
horizon, the current Patent Box
remains in place for the foreseeable
future, despite the foreshadowed
June 2016 guillotine. Additionally, we
do not yet know the ramifications of
the June 2016 date for companies
which have already elected in to the
current Patent Box regime. However,
businesses that wish to maximise
their opportunities under the current
scheme should ensure that they
progress their patent applications as
much as possible in advance of the
June 2016 deadline.
7
To find out more
contact Michael Jaeger
