Changes to the UK Patent Box scheme could affect how much tax relief companies can claim on their UK corporation tax. To be able to take advantage of the scheme before the changes come in to force, companies need to act quickly, with key deadlines falling at the end of 2015, and the end of June 2016.

The Patent Box scheme was set up by the UK government in April 2013 to allow companies to reduce the corporation tax payable on profits related to patented inventions.

A number of the UK’s European partners (most notably Germany) objected to the rules of the Patent Box scheme, arguing that it could be abused to avoid paying tax that should otherwise be paid. Under a deal struck in November 2014, the rules of the Patent Box are set to be changed.

At the end of last week, the government closed a consultation document on the new rules, and they have also outlined the timetable for when the rules will be implemented, and when companies must act in order to be able to take advantage of the old rules.

The rule changes

Under the existing rules, to qualify for the Patent Box, a company must:

  • Either own or have an exclusive license for a patent;

and

  • Should also have carried out qualifying development in relation to the patent.

The new rules have not been published yet, but based on the agreement of November 2014, they are likely to add that:

  • The amount of tax relief that can be claimed will depend on the amount of research and development the company carries out in the UK;
  • Money spent on external research, or acquiring technology, will be able to be included in the Patent Box calculation, but will be capped;

and

  • To claim Patent Box relief, a company must have substantial economic activities in the UK.

It is likely that the new rules will exclude some companies from the Patent Box scheme, and may make it harder to claim relief, or reduce the amount of relief that can be claimed.

Important dates

The new rules are not due to come in to force until 1 July 2016. This means there is still time for companies to enter the scheme under the old rules. Companies that enter the scheme under the old rules will be taxed under those rules until 30th June 2021. Companies entering the scheme after the new rules come into force will only be taxed under the new rules.

There are two key dates if you are considering claiming Patent Box relief:

  • 1st January 2016

If one member of a group of companies develops a patented invention, other members of the group may still take advantage of the Patent Box.

However, if the ownership of patents is moved within a group of companies after 1st January 2016, the old Patent Box rules for calculating the amount of tax relief will only be applicable until 31st December 2016, rather than 30 June 2021.

Therefore, any existing patents or patent applications that may be beneficial to other group of companies should be assigned before the end of the year.

  • 30th June 2016

To qualify for the Patent Box under the old rules, companies must have elected into the Patent Box scheme, and filed a patent application, before 30 June 2016. This way, Patent Box relief on all profits made up to 30 June 2021 will be calculated under the old rules.

An election into the scheme can be made by sending a letter to HMRC, and you do not require a granted patent to be able to elect into the scheme – you simply cannot claim tax relief until the patent is granted.

Companies that elect in after 30th June 2016, but which have a patent pre-dating that date, will be able to claim Patent Box relief under the old rules for profits made prior to 30th June 2016, provided they meet the requirements for the Patent Box on 30th June 2016. Any tax relief will be subject to the existing requirements that relief can only be claimed on profits made in the two years before electing into the scheme.

Companies that elected in before 30th June 2016, but whose patent application was filed after that date will be subject to the new rules. This means that some companies may have some patents (and hence some profits) subject to the old rules, and some patents (and hence some profits) subject to the new rules.