How will the new patent box regime impact innovation?
December 18, 2015
HMRC released draft legislation on 9 December 2015, setting out how patent box will be modified going forward.
The positive news is that this broadly follows the structure and content trailed, so there are relatively few surprises for those of you already familiar with Nexus. It is perhaps this audience I have in mind for this article, so if you would like to refer back to the ‘basics’ for any background, please see our website here and our previous blog post here.
The policy intent - to provide incentives for companies to patent IP developed in the UK and ensure new and existing patents are further developed – is once again reiterated. However, it seems the draft legislation might not encourage companies to patent IP after 1 July 2016 until 2021! I’ll explain why (and by ‘new’ IP, I mean IP patented after 1 July 2016).
The proposed treatment for a product that incorporates both existing and ‘new’ IP, is that income from the product has to be apportioned based on the relative value of both sorts of IP.
Income notionally from existing IP is grandfathered, whereas the value derived from new IP falls within Nexus and an R&D fraction must be applied (potentially limiting the claim). Let’s say a vehicle is sold for £20,000, incorporating nine existing patents and one new patent. £18,000 might be claimed under the current regime, leaving £2,000 subject to the more onerous calculation required under Nexus.
HMRC have made it clear that this is only draft legislation, written in a relatively short time frame and so could still change prior to finalisation. HMRC invite comments and, in my view, are looking to be as practical as possible, within the overall OECD constraints.
Other key highlights, noting that this is still draft legislation, include the following.
- The basic patent box approach remains similar (one patent can qualify a full product).
- All companies will have to prepare ‘streamed’ calculations (the pro-rata option will be withdrawn). This could be quite challenging for some - PwC has asked for some concession here.
- The R&D fraction is uplifted by 30% as expected (up to a maximum 100%).
- Tracking will start as early as 1 July 2013 for 'new' claimants, with concessions where detailed R&D expenditure information isn’t available. Existing claimants will be required to track expenditure from 1 July 2016 as anticipated.
- It seems that we still have the concept of patent box losses (a negative attribute that reduces other patent box claims), which is, in my view, out of line with other European regimes.
Finally, we now know that the draft legislation, will prevent some post 1 January 2016 IP transfers from qualifying for the current regime until 2021. Unless the IP could already be eligible for an existing IP regime, even a UK to UK transfer could be caught by the anti-avoidance measure. Comparably, the transfer of IP already elected in to an existing IP regime should not be caught. Learn more about this in our last Patent Box blog post here.
Do get in touch if you would like further details or have questions. And warmest wishes for the festive season.
Angela Browning | Patent Box