The Patent Box is a special tax regime offering a large reduction in corporation tax on profits derived from patented technology.  It came into force as recently as April 2013 and its full benefit has yet to be felt since the tax reductions are being phased in over several years.

But a joint statement issued by the German and British governments proposes that all such schemes should be closed to new entrants in June 2016 (although the suggestion is that IP within existing regimes should be able to retain the benefit of them until June 2021.)

The Patent Box had already come under scrutiny from the European Commission following a complaint made by Germany. This was despite the EU’s seemingly positive attitude to such schemes in the UK and other European states in earlier years.

The recent joint statement refers to ongoing work of the G20 and the OECD relating to harmful tax practices. It is intended as a basis for consideration by those institutions, so there is as yet no certainty over whether the proposals will be adopted. By reducing taxation in a specific country, patent boxes give an incentive for corporations to account for their profits in that country and not elsewhere. It is thus easy to see why countries that do not run such schemes might find them objectionable.

The proposal implies that the existing Patent Box may be replaced with a new scheme, but that qualification for that may be more onerous than at present, requiring consideration of where R&D expenditure on the creation of the relevant technology took place. It also refers to “grandfathering” provisions, enabling Intellectual Property within existing schemes to retain the benefit of them until 2021.

Practical Implications

Our impression, from discussion with numerous companies over recent years, is that take-up of the Patent Box has so far been patchy. It seems that the additional accounting burden it imposes has been taken by many patent-owning firms to outweigh the benefits in terms of tax saving, although this balance had been expected to shift somewhat as the tax reduction was phased in.

The recent proposals, if adopted, would still allow companies that benefit from the grandfather arrangements another seven years in which to make use of the Patent Box. This may even give an incentive to some to file and prosecute patent applications rapidly, to try to ensure that they do get this benefit.

Much remains uncertain and we will endeavour to report developments as they occur.