UK Patent Box - the recent changes explained

The much anticipated ruling by the European Courts ("EC") on the future of the UK Patent Box was announced this past December 2014, with some significant changes.  As mentioned in my prior blog "UK Patent Box - 5 points to consider to reduce your tax to 10%", the regime was accused (mainly by Germany) of "promoting unfair [or] harmful trade competition" by being excessively generous.  It was further argued that the regime was "encouraging companies to artificially shift their profits to the UK to the detriment of other [EU member] states' tax collections."  Although this was definitely not the intent of the regime,  I can see how it could have been abused - one doesn't have to look further than the recent US pharmaceutical transaction to buy a UK company that was stopped by the Office of Fair Trade, judging its primary purpose as a shift of profits to a lower tax regime.  Thus, after a lengthy debate between a number of EU member states (as the UK is not the only European country that offers such an incentive), an agreement was reached to change the current form of the regime.

There are four main changes to the regime, which are as follows:

1) The main change that came about from the EC ruling was the restriction on where the actual R&D work takes place; in order to avail of the regime R&D now needs to be carried out within the UK. This means that a company won't be able to purchase or develop R&D from outside the country.  The effect this has is that it limits the number and types of companies that can opt in to the regime.  As mentioned in my prior blog "UK Patent Box - 5 points to consider to reduce your tax to 10%", the UK government's intent in providing the regime is to support entrepreneurship and innovation within the country, by supporting both home-grown companies, but also by attracting foreign companies (specifically US companies that don't have an equivalent offering in their jurisdiction) into the UK.  As such, this intent is now effectively limited.

2) Another change resulting from the ruling is that there will be a 30% uplift on qualifying expenditure's value where related party outsourcing or acquisition costs are incurred.  That means that companies can claim a 30% uplift on qualifying expenditure.

3) The issue of supporting documentation also came up, which was another anticipated area of scrutiny by the courts.  Companies are urged to keep detailed supporting records on their R&D expenditure in order to best support their claims.  It is highly likely that HMRC will apply a high degree of scrutiny on the support workings provided by claimants.

4) These changes to the regime are to affect any company that will "opt in" after the 30th of June 2016.  That means that new rules won't be applied retrospectively.  The UK Patent Box is also going to be abolished by 2021 in its entirety.  Due to these timing restrictions, it is anticipated that there will be a rush by companies to opt into the scheme prior to the 30th of June 2016 in order to avail of the more generous benefits, at least up to 2021.  We urge any company that would qualify for the regime to notify HMRC of their intention in writing as soon as the decision to "opt in" is made, and to factor this into their tax return as soon as possible.  

We are of course are here to answer any questions you may have on the matter; we are always happy to help.