Government seeks to amend Patent Box tax loophole

The Government has issued a consultation document seeking to amend the Patent Box scheme which has been used by multinational companies to reduce their tax rate to only 10 per cent, according to accountants BDO.

The Patent Box regime applies a reduced rate of corporation tax to profits derived from patents, and was part of the Government’s drive to provide an incentive for companies in the UK to retain and commercialise existing patents and develop new innovative products.

One of a number of similar schemes offered by countries across Europe, there has been concern that companies are using these preferential schemes to artificially shift profits between countries and lower the amount of tax paid; which has come under a lot of scrutiny both politically and in the media.

Although the UK Government has been playing a leading role in global initiatives to counteract harmful international tax practices, it has not been immune to criticism from other jurisdictions over its Patent Box regime.

Peter Gouw, tax partner with BDO, explains: “It is clear that, when used appropriately, Patent Box is a useful and important tool for businesses which are involved in research and development and other areas. It has been used by other businesses to reduce their tax liability and these proposed government changes seek to clarify how this benefit can be used.”

“The Treasury is going to adopt the “nexus approach” as recommended by the Organisation for Economic Cooperation and Development (OECD) as part of its Base Erosion and Profit Shifting (BEPS) project. This means that patent income received by a UK company could only fall within the Patent Box if it was directly linked to research and development (R&D) expenditure incurred by a company with ‘substantial economic activities’ in the UK.

Mr Gouw continues: “This potentially allows for the R&D work to be carried out overseas as long as it is the UK resident trading company that pays for it (although there will be certain restrictions for connected party outsourcing).”

“The proposals envisage that the current regime will end in June 2016 for new entrants, although businesses with existing qualifying patents or products would be able to retain the tax benefits until June 2021. Profits derived from patents granted or commercialised after June 2016 will only benefit from the Patent Box scheme if the R&D needed to develop the intellectual property (IP) was paid for by companies that genuinely trade in the UK.”

Mr Gouw added: “This is a sensible approach to differentiate between companies who genuinely invest in R & D and those who are simply using this as a means to reduce tax. It recognises that it can take many years to develop a patentable product, with many different research projects contributing to the final patent application – so tracking R&D expenditure related to patents will be a key challenge under the new rules. If you are considering acquiring IP from a related company in your group, you may need to take urgent action. You will also need to start tracking expenditure and may have to re-organise R&D work across the group to ensure that all appropriate expenditure is incurred by the UK trading entity that will be the patent owner. In this way your tax relief will be ensured and compliant which is clearly beneficial in the long term.”