Following its recent consultation (discussed in our November 2015 update), the Government has now published information and draft legislation on its proposed changes to the design of the UK Patent Box in order to comply with the new international framework for preferential tax regimes for IP set out by the OECD. The proposals will be contained in the Finance Bill 2016.
The new regime will take effect for new entrants to the Patent Box on or after 1 July 2016, and also for some IP assets that are acquired on or after 2 January 2016. IP that is not covered by the new rules will continue to receive the benefit of the existing rules until 30 June 2021 (albeit some IP acquired on or after 2 January 2016 may only receive the benefit of the existing rules until 31 December 2016).
Under the proposed changes, the ‘streaming’ method will apply to all cases, at the level of an IP asset, a product or a product family. The legislation will provide that, after separating out qualifying income and corresponding deductions, these must be allocated to ‘sub-streams’ which correspond to the different IP assets, products or families so that a profit can be calculated for each sub-stream. The figure will then be modified by applying a fraction to the profit figures, in order to reflect the proportion of development activity that has been undertaken by the company itself on the asset, product or product category. The final figure will be the profit which is eligible for the reduced rate of corporation tax.
The Government’s policy paper identifies some of the impacts of the proposed changes. Whilst it expects the overall impact to be ‘relatively small particularly in the early years’ (due to the transitional arrangements), it highlights that the measure will potentially affect up to 2300 patent holding companies which would be eligible for the modified Patent Box, some of whom may decide to restructure in order to maximise the benefits. There will also be some one-off costs as businesses familiarise themselves and stream their old patent accounts data, and ongoing administrative costs.
In preparation for the new regime, businesses should review their IP portfolios and expenditures, and accounting functions, and consider whether elections into the Patent Box should be made on or before 30 June 2016. In particular, the rules provide that an application filed before 1 July 2016 will not constitute new IP for the purposes of the new regime and so can continue to potentially benefit from the existing regime.