The Death of the UK Patent Box regime? – All is not lost!

John Moore, December 4th, 2014

You may have read recently about the abolition of the UK Patent Box regime following moves to restrict preferential intellectual regimes under review by The OECD and the EC. However all is not lost, despite what you may have been told! However your company may have to ensure that it is elected into the current regime in the relatively near future, if it wants to be able to take advantage of the existing legislation and not suffer any potential restrictions to the benefits this currently gives.

However for many companies developing their IP by performing R&D in the UK, it looks like the Patent box will actually continue to operate as at present for the foreseeable future.


On 2 December 2014 the Government confirmed the situation with regard to the forthcoming OECD inspired changes to the UK Patent Box regime. The changes announced have been aimed at ensuring that any such tax relief introduced, including the UK Patent Box regime, is not “harmful” in its operation, and requires a level of substantial activities in the country that supports real economic activity.

A significant majority of the OECD- G20 members supported a “Modified Nexus” approach in order to ensure the appropriate level of substantial activities. What this essentially does is set a restriction on the amount of Patent Box benefit that can be achieved by a company in a jurisdiction by looking at the ratio of In country R&D spend to worldwide R&D spend that flows into the patent under consideration. Only that proportion of the Patent Box benefit relating to the “in country” spend would then be allowed. The UK and three others supported an alternative transfer pricing approach. In the interests of reaching agreement on this issue the UK agreed to work with Germany to try to find a compromise position.

On 11 November the UK and Germany published a joint statement, which adopts the main features of the modified Nexus approach but amends these in order to take account of previously expressed UK concerns regarding the inclusion of related party outsourced R&D expenditure subject to a 30% cap. This is known as the re-modified nexus approach.

So what happens now?

At recent meetings at the end of November 2014 of the OECD Forum on harmful tax practices (FHTP) and the EU code of conduct group  the joint UK/German proposal was welcomed and will now form the basis of continuing work by the FHTP to determine how the approach will work in practice. As part of this agreement countries with existing IP regimes, such as the UK with the Patent Box regime, must amend their IP regime legislation to become compliant.

What does this mean for the UK Patent Box regime?

As we understand it the UK Patent Box as it currently exists is very largely compliant with the OECD’s desire that these regimes should not be harmful. All that will be required is a change in the UK legislation to bring in the restriction referred to above, in addition to the existing legislation, to ensure that there are substantial associated R&D activities in the UK if the Patent Box relief is to be given to a UK claimant company.

As a result the UK has had to agree to close the existing, non-nexus compliant, Patent Box regime to new entrants by 30 June 2016. Following a period of “grandfathering” which will last until 30 June 2021, for those companies elected into the regime by 30 June 2016, and under which they can use the existing non nexus compliant UK scheme, only the nexus compliant calculation method will be allowed. So those companies that will be affected by the re-modified nexus approach will need to ensure they are elected into the UK Patent Box regime before 30 June 2016 and they will be able to take advantage of this until 30 June 2021. After this date the Patent box will have to be calculated using the re-modified nexus restriction above for all companies. The current and new regimes will have to run in parallel for the period to 30 June 2021.

The legislative process to ensure that the UK’s Patent Box regime conforms to the re-modified nexus approach will begin in 2015. The Government intend to consult on the changes to be made once the FHTP has completed work on the detail of the new rules. Transitional arrangements will include agreeing the formulation of tracking and tracing rules for the IP under the nexus approach.

Our View

The Government has announced that the changes that it has secured to the original approach proposed by the OECD will protect the interests of the UK by retaining a competitive Patent Box regime. In our opinion the compromise they have agreed to may not impact massively on the ability of smaller companies to claim as they currently do, as often the vast majority of any R&D work leading to IP that falls within the regime would take place in the UK. However larger companies, that operate a much more global approach to R&D, may well be more adversely affected, seeing a reduction in the benefit that they can take post 30 June 2021. For IP generated by 30 June 2016 there is at least some certainty the regime will continue to operate as at present until 30 June 2021, provided the company is elected in by 30 June 2016, and will probably operate as at present with only the announced changes post 30 June 2021.

Please do not hesitate to contact John Moore on 0207 292 8850 or if you would like to discuss the implications of this for your company.

This briefing is prepared by Kingly Brookes LLP, a limited liability partnership. For further information on any of the material contained in or referred to in the briefing, please contact us. This briefing note is intended to keep our readers up to date with the developments in this area, but it is a general guide only and is not intended to be a comprehensive statement of the law and practice in this area. No liability is accepted for the opinions it contains or for any errors or omissions.