Patent Box3 February 2015
The UK's Patent Box regime, hailed for transforming Britain as a place to invest, will be weakened, following a compromise reached with Germany, over the alleged competitive advantage it gave Britain over its fellow EU member states.
The current UK Patent Box allows companies to pay very little tax (10%) on profits generated from patented goods and services. Its purpose was originally to encourage companies around the world to do their research and development in the UK.
However, it has attracted criticism that it also encourages overseas companies to use Britain as a tax haven by artificially housing their overseas patented activities in the UK just to save its tax bill.
In September 2014 it became clear that Britain faced international opposition, led by Germany, over its refusal to adopt new curbs on the patent box. While 40 countries supported these curbs –– the UK was joined by just Luxembourg, the Netherlands and Spain in opposing them.
The current UK Patent Box is more generous than other IP regimes as it requires only one patent in a product for the whole product to qualify. For example, a patented invention in an exhaust system will result in the whole car qualifying for the relief. It also allows companies to access the lower tax rate even where the associated R&D activities were not undertaken in the UK.
It’s not just royalties and income from the sale of IP that qualifies, but the entire profit (minus a routine profit and a deemed marketing royalty) from sales of products which incorporate a patented invention.
The policy has proved popular since coming into effect in April 2013, with major pharmaceuticals business GlaxoSmithKline relocating 150 overseas research projects to the UK in order to take advantage of the scheme. GSK is building its first new factory in Britain for 40 years, investing a whopping £220million in the UK.
However, Patent Box was found to be TOO generous, and will be replaced with a similar LESS GENEROUS scheme. Entry into the current Patent Box scheme will be closed June 2016 - it may be sooner. Furthermore, we know that the present Patent Box benefits will be terminated for companies who have entered the system.
The new Patent Box scheme will probably have greater limits on which patents/product designs are eligible and there will also probably be some shift in the way the tax relief is calculated.
Since it is not clear when the new Patent Box scheme will come into force, and given the more stringent qualifying criteria likely to be applied, if you are considering making use of patent Box, don't delay any more!