In April 2013 patent box was introduced to encourage innovation and keep development, manufacture and exploitation in the UK. Patent box is set to lower corporation tax down to 10% for some elements of an innovative company’s profits – whether those profits come from domestic or international sales.
The benefits of patent box to companies paying UK corporation tax could therefore be very significant.
However, patent box has come under some scrutiny since it was launched. This started with queries raised over its possible use to avoid tax payment by the Public Accounts Committee. Germany then voiced concern to the European Commission (EC) that the patent box regime breaks European Union tax laws. This has lead to an EC enquiry which has resulted in the EC’s Code of Conduct Group looking at raising an objection to the patent box regime.
As patent box is not a State Aid it did not need any approval from the EC to come into effect and, as a result, the EC Code of Conduct Group cannot force a change of legislation in the UK. The EC Code of Conduct Group can however assert its persuasive powers on the UK Government to try to get it to make changes to the patent box legislation.
The UK government has purportedly provided a ‘robust defence’ of the patent box tax incentive, stating that it was “confident” that the regime did not breach the Code of Conduct. However it remains to be seen whether the UK government will need to make any changes to the legislation.
From a practical perspective, the UK Government has made it clear that patent box is very important to the corporate tax strategy put in place in the UK. Accountant contacts of Barker Brettell have told us that at worst they believe that these challenges raised to patent box could result in minor changes to the implementing rules, but only time will tell.
In the meantime patent box is still an important piece of legislation for your company if you pay UK corporation tax, allowing significant corporation tax reductions for some areas of profit. It therefore seems sensible for your business to continue using and planning for the future use of patent box and its benefits as part of its business plans despite the challenges raised to the patent box regime.