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Patent Box – Is it business as usual?

By way of backdrop, the “Patent Box” tax relief system was introduced from April 2013 as part of a package of measures to encourage entrepreneurial development in the UK.  Ultimately, the effect will be to charge qualifying profits at a reduced rate of Corporation Tax of 10% (as compared with the normal current rates of 20% to 21%, depending on the level of profits).

The full benefit of the relief is being phased in over time, through to 31 March 2017.  Over that period, a percentage of qualifying profit will attract relief, as follows:

     Year to 31 March 2014:            60 per cent

     To 31 March 2015:                    70 per cent

     To 31 March 2016:                    80 per cent

     To 31 March 2017:                    90 per cent

     From 1 April 2017:                    100 per cent

Your company can benefit from the Patent Box if it owns or exclusively licenses-in patents granted by:

  • the UK Intellectual Property Office,
  • the European Patent Office, or
  • participating authorities in the European Economic Area.

The company (or another group company) must also have undertaken qualifying development for the patent by making a significant contribution to either:

  • the creation or development of the patented invention, or
  • a product incorporating the patented invention.

Companies holding certain other medicinal or botanic innovation rights may also benefit from the relief.

The Patent Box was not a UK invention.  In introducing it, the government was following the lead of other European countries including the Netherlands, Luxembourg and Belgium, all of which were already offering rates below 10% through their own schemes.

Now, the European Union is looking into these reliefs, Europe-wide, under its anti-state-aid rules.  This follows a complaint from the German Finance Minister that such schemes result in unfair competition.  It is perhaps worth noting that the recent abortive Pfizer bid to take over AstraZeneca was openly, in part, based on the advantages of the Patent Box.  So maybe he has a point.

A key issue to note is that member states can be required to recover “illegal” aid from companies which have received public support in breach of the state aid rules.

So how should we respond to these circumstances?  Is it still a good idea to lodge claims against a backdrop where the tax savings could ultimately have to be paid over to HM Revenue & Customs?

We have no qualms in continuing to help our clients identify and lodge potential claims under the Patent Box rules.  We will of course raise and discuss the issue of the EU attack on a case-by-case basis.  However, at present, the UK government is robustly defending its position.  Moreover, previous experience shows that actions under the state aid provisions usually result in modifications moving forward, rather than the retrospective withdrawal of a tax relief.

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