Last week the UK and German governments jointly proposed changes to tax regimes which incentivise intellectual property such as the Patent Box. Richard Turner, Managing Director for Tax and Innovation at FTI Consulting, looks at how the proposals could change the scheme.
The proposal suggested by the two governments is to adapt the nexus approach put forward by the OECD in its Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance report, which was published as part of its Base Erosion and Profit Shifting Project. The principal objective of the proposal is to establish the requirement for substantial economic by requiring tax benefits to be connected directly to R&D expenditures.
In broad terms, the Patent Box benefit will be reduced by a fraction determined by qualifying (good ‘in country’) R&D over total R&D and any cost of acquisition of IP rights. Detailed definitions and rules are yet to be finalised.
It is anticipated that the modified nexus approach will be introduced and the existing UK Patent Box rules will be closed to new entrants in June 2016 and the old rules will eventually be abolished by 2021. Organisations most likely to be impacted by the requirement to link R&D expenditures to income will be:
- Groups migrating to the UK
- Foreign headquartered groups licensing rights to a UK company to manufacture and distribute patent products
- UK companies acquiring IP rights
- UK companies outsourcing R&D to affiliated companies outside the UK (note: there would be no restriction for UK companies who outsource to third parties)
This is certainly not the Death Knell of the patent box. Many companies are unlikely to be affected if all of their R&D has been and will be undertaken in the UK, although the compliance burden from having to track R&D expenditure is likely to increase. Companies in-licensing technology may see a reduced patent box benefit and this may result in a trend to corporate acquisition over licensing so that acquirers inherit the R&D history.
As the new rules are being formulated it is important that industry expresses any concerns or key requirements. One aspect that is essential for life science is the retention of the inclusion of exclusive licenses and another helpful measure would be the ability for SMEs with losses to monetise the benefit.
The BIA is currently setting up a working group on the Patent Box. If you’re interested in joining, please contact Pamela Learmonth.