Patent box brought into line with international rules

Companies will to scrutinise their R&D activity more closely under proposed changes to patent box regime

BUSINESSES will to scrutinise their R&D activity more closely under proposed changes to the design of the UK Patent Box regime outlined by the government

The government is making the changes in order to comply comply with new international tax rules for intellectual property set out by the OECD.

Under the changes, the amount of profit from an IP asset which can qualify for the reduced 10% rate of corporation tax available through the patent box will depend on the proportion of the asset’s development expenditure incurred by the company.

Based on draft legislation, which will be implemented on 1 July 2016, tracking and tracing R&D expenditure from start to finish could soon be a requirement when calculating how much profit generated by a specific product or its IP can benefit from patent box.

“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,” said Michael Jaeger, patent attorney at Withers & Rogers.

According to Jaeger, 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.

“The changes are intended to block profit shifting. However, they could also catch out some larger companies if they fail to take steps to document all related expenditure in order to evidence the fact that activity is substantively taking place in the UK,” he said.