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UK Government consultation into proposed changes to the UK patent box

Yesterday the UK Government opened a consultation into proposed changes to the UK patent box. Responses are due by 4 December 2015.

The UK patent box is a preferential tax regime that enables companies to apply a lower rate of corporation tax to profits earned from its patented inventions. The tax relief has been phased in from April 2013, and the original intention was for companies to be able to apply the reduced 10% tax rate to 100% of the qualifying income earned from its patented inventions by April 2017.

The patent box has proved extremely popular – according to the Treasury, 639 companies have so far received a combined benefit of £335 million under the regime – but it does have its critics. The UK Government has come under intense pressure to make changes from Germany, in particular. It was announced in December 2014 that the current patent box would be closed to new entrants on 30 June 2016, but to date there has been no final announcement about what will replace it.

One concern with the current patent box is that it might facilitate profit shifting by multinational companies. The UK Government has declared itself committed to reforming international tax rules to ensure that multinational companies pay their fair share of tax. A key aim of the reforms, therefore, is to ensure that the patent box requires sufficient economic substance, so that it cannot be a tool for artificially avoiding tax obligations.

The current proposal is that the UK adopt the so-called “nexus approach”, whereby the tax benefit is linked to a requirement that the company conducted the substantial activity that generated the income it wants to benefit from the regime. Under this approach R&D expenditure is used as a proxy for substantial activity, meaning that the company must itself have incurred the R&D expenditure incurred in developing the IP.

The Treasury has now opened a consultation and is inviting responses by 4 December 2015 on the “substantial activities” that determine what profit can benefit from the patent box. It aims to publish draft legislation in December this year, followed by a response to the consultation and any changes to the draft legislation in Spring 2016.