UK’s highly beneficial patent box tax relief curtailed

20 November 2014

It was recently reported that the scope of the UK’s highly competitive patent box relief is set to be reduced after government officials have settled a dispute with Germany and the EU over the tax break.

Tax relief under Patent Box, which promotes investment and innovation by offering a reduction of corporation tax to as low as 10% for income from patents and certain other intellectual property, was introduced to encourage high-tech businesses to commercialise their intellectual property in the UK. The reduced rate is applied not only to profits on sales in the UK but potentially worldwide, making it one of the most competitive reliefs in Europe.

However, the tax relief came under pressure from Germany and other EU allies who opposed the regime, suggesting it could result in the shifting of corporation taxes to the competitive disadvantage of other European states. Days ahead of the G20 leaders’ summit in Australia a compromise was reached which sees agreement that preferential tax treatment will only be granted in cases where the patent is linked to research and development carried out in the UK.

“The proposal is based on the modified nexus approach proposed by the OECD, which requires tax benefits to be connected directly to R&D expenditures,” the Treasury said.

Where does this leave us?

We are concerned about the effect the new proposals could have on SMEs. Since the introduction of Patent Box last April, there has been particular encouragement to SMEs involved in developing, making and selling innovations to apply for patents and claim a reduction in corporation tax.  The government is keen to support SMEs as an engine of growth, where it hopes a lot of the high-tech/high-value jobs will be created, yet it is difficult for SME’s to plan for the long term when they have to deal with the uncertainty of having tax breaks put in front of them that later get pulled.

All existing Patent Box regimes will be closed to new entrants in June 2016 and will be abolished by June 2021. However, to allow time for transition to new regimes based on the modified nexus approach, intellectual property within existing regimes will be able to retain the benefits of these until June 2021. Therefore, if your company has patents issued by the UK or European patent office it is important that you act now to ensure that you get into the regime by June 2016, and that you retain the benefits to June 2021.

If you don’t act now you could lose out. Please contact your usual UHY partner for more information about how you could be affected.