The Patent Box – Harmful competition?

John Moore, November 20th, 2013


There have been reports in the media that, following a leaked report drafted for the EU Code of Conduct Group meeting on 22 October 2013, the European Commission has decided that the UK Patent Box amounts to harmful tax competition.
The Code of Conduct requires Member States to refrain from introducing any new harmful tax measures (“standstill”) and amend any laws or practices that are deemed to be harmful in respect of the principles of the Code (“rollback”). The code covers tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on the location of business in the Union. The Code is not legally binding but, having been adopted by Member States, carries political force.

What aspects are considered to be harmful?

We understand that the EC has concerns that the UK Patent Box could amount to harmful tax competition in two areas.

  • Firstly that the significant involvement in the development of the innovation to which the qualifying IP rights relate, and the requirement for groups that the rights must be actively managed, can be satisfied without there being sufficient economic activity or substance in the UK. The code requires that tax advantages are not to be granted in the absence of any real activity in the country concerned.
  • Secondly that the calculation of the Patent Box departs from international standard for the determination of profits because it computes an enhanced deduction by reference to a statutory formula and that it may not apply OECD transfer pricing principles.

We understand that the EC have concluded that the UK Patent Box meets the three other criteria under consideration. However the Code of Conduct group have not been able to reach a majority decision and the issue has been referred to the Economic and Financial Affairs Council (ECOFIN) for consideration in early December 2013.

Government response

Having considered the above HM Treasury and HMRC are confident that the UK’s Patent Box does not breach the EU Code of Conduct Group’s criteria, and consider that it is more tightly defined and imposes tougher eligibility criteria than other similar measures in operation that have previously been considered by the Code Group, citing the regimes in France, Spain, Belgium and the Netherlands.

Next Steps

If ECOFIN do conclude that the Code of Conduct has been breached then there is a range of outcomes possible. It could be that no changes are required to the UK regime, or that some changes would require to be made to meet the specific Code of Conduct requirements, or that Patent Box regimes should be rejected altogether. However this last outcome would seem unlikely given the number of countries that already operated regimes that have been deemed acceptable.

The Code of Conduct Group cannot force the UK to alter the domestic tax legislation since the code of conduct is not a legally binding agreement. However it could be the case that the group could pressurise the UK into making some concessions for political expedience.

Our view

The UK Government has made it clear that it sees the Patent Box as a key part of it tax strategy for promoting innovation in the UK. Given HM Treasury’s robust initial reaction we think that it is highly unlikely that the relief would therefore be withdrawn in the UK although it is always possible that some minor changes could be made. It is very unlikely that any changes would be made retrospectively and companies can rely on the existing law until changes (if any) are made.

Companies should therefore continue to prepare for and make elections for the Patent Box relief under the legislation as it stands.

Please do not hesitate to contact John Moore on 0207 292 8850 or at 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.