The Patent Box allows companies to pay lower taxes on profits from patented products. In effect, the current rate of 21 per cent can be reduced to 10 per cent by 1 April 2017.
Under the current scheme, companies can qualify for the Patent Box if they are liable for UK corporation tax and make a profit from exploiting patented inventions. However, Germany has been vocal in criticising the present arrangement on the basis that it encourages artificial shifting of profits from countries with higher tax regimes.
Under the new agreement, the UK will join other OECD countries in only granting tax breaks for patents directly tied to research and innovation at home. As such, the question of eligibility will depend on the location of the R&D expenditure associated with the development of the patent or product. However, where related outsourcing or acquisition costs are incurred, which do not qualify directly as R&D expenditure, it is proposed that companies will be able to obtain a maximum 30 per cent uplift of their qualifying expenditure (subject to a cap on the actual expenditure).
The existing regime is likely to close to new entrants (products and patents) in June 2016 but “grandfathering” will allow IP in the existing regime to retain tax benefits until June 2021. Companies should therefore consider applying for the patent box before June 2016 if they wish to benefit under the more relaxed qualifying criteria presently in operation.
This agreement comes just as the Irish government is considering introducing their version of a Patent Box – which they refer to as a “Knowledge Box”. It therefore remains to be seen, as to whether application of the Irish scheme is similarly curtailed.
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