Proposed changes to the UK Patent Box scheme mean that businesses need to scrutinise their R&D activity more closely in order to qualify for future tax relief

Based on draft legislation due to be implemented in July, the tracking and tracing of R&D expenditure from start to finish could soon be a requirement when calculating how much of the profit generated by a specific product or its intellectual property (IP) can benefit from Patent Box. 

Patent Box is a tax incentive introduced by the UK government in 2013 to encourage companies to commercialise their patents by reducing the tax paid on profits.

This draft legislation is intended to comply with the new, internationally harmonised framework for preferential IP regimes developed by the Organisation for Economic Cooperation and Development. 

The amended legislation will bring changes to the way eligible profits are calculated. A new formula for making these calculations, called the R&D fraction, will require businesses to specify all costs associated with their inventions in order to calculate their tax relief.

This is a significant administrative burden for businesses, particularly those with more complex operating structures where some R&D activity is carried out by third parties or sister companies, whether in the UK or overseas.

While the changes are intended to block profit shifting, they could also catch out some larger companies if they fail to document all related expenditure in a way that proves the activity is substantively taking place in the UK.

To compensate for the additional administration, Withers & Rogers is urging HM Treasury to consider removing the current taper system for Patent Box. Due to the R&D fraction, Patent Box is likely to be less beneficial to some companies, however if the government removed the current taper system now rather than in the next tax year when it was due to expire, it could make up for the negative impact of the R&D fraction on Patent Box relief.

The government’s draft legislation on the UK Patent Box scheme was published in December. The consultation period has now ended, however, HMRC is still keen to receive feedback from companies and their financial advisers. Comments on the draft legislation should be submitted by 3 February 2016.

Read the draft legislation:

The author: 

Michael Jaeger is a patent attorney at Withers & Rogers