Draft legislation for the modified UK Patent Box regime
Following the Organisation for Economic Co-operation and Development’s report in October, setting out the international framework with which the ‘next generation’ of Patent/IP boxes will need to comply (which HGF reported here), the draft legislation for the UK’s modified Patent Box regime was published earlier this month.
The government’s consultation on the design of the new Patent Box only closed a few days before the draft legislation was published and final legislation, taking full account of the consultation responses and comments on the current draft, is expected in 2016.
Some of the key points of the draft legislation to note, especially on the IP side, at this stage are:
- The changes will have effect for companies entering the Patent Box for the first time for an accounting period beginning on or after 1 July 2016, for income from a patent/IP asset created on or after 1 July 2016 and also for income from some patents/IP assets acquired on or after 2 January 2016.
- Companies may be able to be ‘grandfathered’ into using the old regime until 1 July 2021 for income from existing IP.
- If a company X wants to be grandfathered based on IP which is currently owned by a related company or person (which is not benefitting from an IP tax regime) and company X does not currently have a ‘Patent-Box compliant’ exclusive licence, the licence or transfer of the IP to company X will need to take place on or before 1 January 2016 for company X to be able to continue to benefit from the current regime beyond 31 December 2016 (and until 1 July 2021).
- In the current draft legislation it is the ‘filing date’ and not the ‘priority date’ that is the relevant date for determining if an IP asset was created on or after 1 July 2016 and therefore whether a company can rely on the grandfathering provisions for profits from that IP asset. Companies wishing to continue to use the current regime are advised to ensure that GB, European or other qualifying patent applications are filed before 1 July 2016. Moreover, companies should note that in order to continue to use the current Patent Box regime the company must also have acquired the rights to the invention (own or exclusive licence) before 1 July 2016.
- The simplified ‘proportional profit split’ methodology of identifying IP profits (where a company’s taxable trading profits could be split into IP and non IP parts based on the ratio of qualifying income to total income) will not be available under the new regime. The ‘streaming’ methodology will apply in all cases and separate profit streams will need to be identified at the level of IP asset, a product or a product family.
- Under the new regime, a separate R&D fraction “N”, which may reduce the benefit, will need to be applied to all profits streams related to qualifying IP:
N = (D+S1)*1.3/(D+S1+S2+A)
D = In-house direct expenditure on relevant R&D
S1 = Expenditure on relevant R&D subcontracted to unconnected parties
S2 = Expenditure on relevant R&D subcontracted to connected parties
A = Expenditure on acquisition of relevant qualifying IP rights
D, S1 and S2 will be defined using the same definitions as for the categories of expenditure in the UK R&D tax reliefs.
- If companies are grandfathered into the old regime based on a patent filed before 1 July 2016 but the product also includes IP related to a patent filed after 1 July 2016, companies may need to split the profits based on old IP and new IP and apply different rules.
Inevitably companies will have many questions about how the proposed rules apply in practice and it is expected that guidance will be issued in due course. The final legislation is also expected to include additional provisions relating to calculating the R&D fraction in cases where companies engage in collaborative development or where businesses with separate R&D histories combine.
Our Experts are on hand to talk you through the changes, to provide further information and to assist our clients in understanding how the proposed changes apply to their businesses.