In a compromise agreement, the Government is to water down the ‘Patent Box’ scheme, which provides tax incentives to companies who can attribute profits to patents and other types of intellectual property.
What is the Patent Box?
Put simply, this incentive applies a lower rate of Corporation Tax (CT) to any profits made after 1st April 2013 from patented inventions. The current CT rate for eligible profits is 10% (compared to the prevailing main rate of CT of 21%, and small profits’ rate of 20% in 2014/15).
Significantly, the Patent Box has been designed to take into account and complement R&D tax credits (which most patent owners will already utilise).
To qualify for CT relief, your business must either own or exclusively license-in the patents, and must have undertaken eligible research and development.
What has changed?
The OECD has been tasked with implementing a programme of international tax reform, and unfortunately for the Chancellor, there has been significant opposition to the UK’s Patent Box rules, which have been deemed to be anti-competitive to overseas markets.
Germany has been particularly critical about the tax measure, as it believes it encourages companies to shift profits artificially to countries which provide a favourable tax treatment for patents.
According to recent press reports – including a piece in the FT last week, a compromise agreement between the two countries will do away with the potential tax avoidance issues surrounding the Patent Box, but will also include “some concessions that would cushion businesses from the proposed reforms.”
Specifically, the Patent Box incentive will soon only apply to research and development carried out in the UK, which would discourage overseas companies from relocating their patents to the UK, as they would also need to carry out their R&D in Britain to qualify.
Bill Dodwell, Head of Tax Policy at Deloitte said that he welcomed the outline agreement, but the compromise still needs to be endorsed by the OECD and G20 before it can be implemented.
“Patent Boxes have always been about incentivising the commercialisation of innovation, whereas R&D expenditure credits support the initial R&D. The UK has a good research record but a less strong commercialisation record – so we are pleased that this support can continue.”