The Patent Box regime, introduced by the UK government in April 2013 to encourage the development of innovative businesses, is to close to new entrants on 30 June 2016 and will shut down completely in 2021.
Patent Box offers wide-ranging tax benefits, and will be fully phased in by April 2017. Under the scheme companies can elect to apply a reduced 10% rate of tax to worldwide profits generated from patents granted by the UK Intellectual Property Office or the European Patent Office. It applies to sales income, licence fees, royalties and income generated from the sale of patents.
It is the wide scope of the existing Patent Box that has created problems. Many countries, including Germany, believe that the wide-ranging UK Patent Box regime is a harmful tax practice that gives the UK an unfair economic advantage. Therefore, in November last year, the UK and Germany presented a compromise proposal to the OECD-G20 members, with the main feature being a modified nexus approach to align the tax benefits of a Patent Box regime with the jurisdiction where the economic activity takes place.
The UK government has announced that it remains committed to a revised patent box regime in order to incentivise innovation and its commercialisation in the UK. It intends to consult on the design of a new scheme once further work has been undertaken by the OCED. However, it is clear that to be acceptable, any new patent box regime will need to align more closely to R&D activities being carried out in the UK. In the meantime, companies can still join the current Patent Box up until 2016 and remain in it until June 2021.