The UK is one of a number of countries that offers a ‘Patent Box’ scheme. This is an incentive that is built into the tax system, to encourage innovative companies to base their R&D operations in the UK. The Patent Box scheme enables UK companies to pay a lower rate of corporation tax.
There is a deadline of 30 June 2016 for electing into the Patent Box and for patent filing, for UK companies who wish to take full advantage of the current scheme. After 30 June, different rules will apply.
The UK government is making changes to its Patent Box scheme in order to comply with a new international framework that has been brought into effect by the Organisation for Economic Co-operation and Development (OECD). The main change is that, under the new Patent Box scheme, the amount of profit attributable to an IP asset (e.g. a British patent, or a European patent validated in the UK) will depend on the fraction of the asset’s development expenditure incurred by the claimant company.
This change is effected practically by adjusting income qualifying for the Patent Box according to the following formula:
Click here to view formula.
N = fraction to apply to the qualifying income (N ≤ 1)
D = In-house direct expenditure on R&D
S = Expenditure on R&D subcontracted to third parties
A = Expenditure on acquisition of IP
R = Expenditure on R&D subcontracted to related parties
This revised Patent Box scheme will be less beneficial to some companies than the previous arrangement. As is clear from the formula above, the best case is that N is equal to one such there is no reduction in the income qualifying for the Patent Box.
The revised Patent Box will come into effect for ‘new entrants’ that join the Patent Box on or after 1 July 2016. New entrants are defined as:
- For a company that has elected into the Patent Box before 1 July 2016, patent applications that have a filing date on or after 1 July 2016; or
- For a company that elects into the Patent Box on or after 1 July 2016, all patents irrespective of filing date.
It is worth noting that patents that are not new entrants will in some cases benefit from the existing Patent Box for a further five years, i.e. until 30 June 2021. It may therefore be favourable for a company that has been considering electing into the Patent Box to do so before 1 July 2016 so that its existing patent applications and patents benefit from the current Patent Box. Additionally, a company that has already elected into the Patent Box may find it beneficial to file new patent applications before 1 July 2016 so that these applications can benefit from the existing Patent Box. In the case of patent applications that claim priority, it may be beneficial to file the application at the UK Intellectual Property Office or the European Patent Office before the one year priority period has expired in order to secure a filing date before 1 July 2016.