Preparing for the new Patent Box scheme
A new Patent Box scheme is due to commence on 1 July 2016 and, for some businesses, the new scheme will not offer the same generous corporation tax relief as the current scheme.
Current Patent Box scheme
The current Patent Box scheme has been running since April 2013, providing a significant corporation tax reduction on worldwide profits attributed to inventions patented in the UK and other qualifying IP rights. The reduction is being phased in gradually, with the lowest 10% corporation tax rate applicable from 2017 onwards.
The current scheme will continue alongside the new scheme until 30 June 2021, but only for patents that have been applied for or granted by 30 June 2016 and elected into the current scheme.
The deadline for electing qualifying patents and patent applications into the current scheme is not until 30 June 2018. The election may be submitted in writing to HMRC or as part of a company’s tax return.
A company can elect out of the Patent Box scheme but it will be barred for five years from re-entering the scheme.
What is changing?
The scheme is being revised following concerns that it might be misused by businesses to unfairly reduce their tax payments. The main change is the addition of a “modified nexus fraction” to the calculation, which will reduce the tax relief available to businesses that do not carry out R&D in the UK or do not outsource their R&D to companies based in the UK.
Which businesses will be affected?
- Businesses that do not carry out or outsource their R&D within the UK will be affected by the switch to the new Patent Box scheme.
- These businesses are likely to be better off electing into the current scheme, which is not dependent on whether or not R&D is carried out in the UK.
- Businesses that carry out or outsource their R&D within the UK are less likely to be affected by the switch to the new scheme.
- It may still be beneficial for these businesses to elect patents into the current scheme to avoid (until 2021) the administrative burden of tracking UK R&D spend that is required under the new scheme.
- Some businesses with high operating costs and already low corporation tax payments may be better off not using the Patent Box at all.
- Patent Box calculations can, in rare cases, lead to an increase in corporation tax payments. Other forms of relief such as R&D tax credits are likely to be better suited to these businesses.
We recommend that UK companies:
- File any new UK patent applications before 30 June 2016 to benefit from the current scheme – new applications filed after this date cannot be elected into the current scheme.
- Consider whether to elect qualifying patents and patent applications into the current scheme before 30 June2018.
- Consider moving their R&D to the UK or outsourcing their R&D to a company based in the UK to maximise the corporation tax reduction available under the new scheme.
This article provides an overview of the changes to the Patent Box scheme. Patent Box calculations are complex and professional advice should be obtained from a regulated tax advisor before taking any action.
If you have any questions or if you need any further information, please contact Dan Rusby-Gale or your patent attorney at Forresters.