Update on the UK Patent Box - Changes to Patent Strategy

The Patent Box regime is a form of corporate tax relief for UK companies which came into force on 1 April 2013. The reduction in corporation tax for patent income is designed to make the UK’s tax system more competitive and appealing as a place for business innovation and growth.

The Patent Box regime has also resulted in new reasons, and new approaches, for obtaining UK patent protection. A more conventional approach aims to obtain patent protection to prevent competitors copying an invention or to attract investment. The new approach is for companies seeking to obtain a UK patent primarily for Patent Box tax savings. Patent protection is therefore now becoming more relevant to a larger cross-section of UK industry. This focus on patents as providing a longer term financial advantage is also leading to some more streamlined and cost-effective approaches to obtaining valuable UK patents. In short, UK patents are becoming more relevant than ever before.

However a number of EU countries, most notably Germany, have taken issue with the existing UK Patent Box regime. In order to obtain the UK tax relief, a UK company must actively exploit innovations that are protected by UK patent rights and/or biotechnology-specific rights, either alone or as part of a group. A major concern is the alleged ability of companies to make use of the UK Patent Box tax savings by profit shifting from other countries, for example whilst not contributing in a significant relevant manner to the UK economy.

Discussions between the UK and Germany have resulted in a joint statement being released by the UK Government, which indicates that new rules will be put in place to ensure that the UK Patent Box regime will take account of the location of the R&D expenditure in developing the patented technology. A joint proposal by the UK and Germany will be put forward so that a modified UK Patent Box regime can be agreed in 2015. The existing regime will then be closed to new entrants in June 2016 as part of the complete transition to the new regime by June 2021.

Whilst the UK Government has had to concede on certain aspects of the UK Patent Box regime, significant tax savings remain available for companies that carry out qualifying R&D work in the UK. There is still good reason to consider obtaining a UK patent, either to prevent competition, or else as part of tax planning. We believe this change to the UK Patent Box regime is unlikely to stop the trend towards a ‘two-tier’ patent system where companies try to achieve these different aims as efficiently as possible.

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