Pharma companies warned on patent box changes
Proposed Government changes to legislation will require businesses to track and trace all R&D expenditure if they want to continue to benefit in the same way, patent lawyers are warning.
Based on draft legislation, which will be implemented on 1st July 2016, tracking and tracing R&D expenditure from start to finish could soon be a requirement when calculating how much profit generated by a specific product or its IP can benefit from Patent Box.
The draft will make changes to the design of the UK Patent Box to comply with a new international framework for preferential tax regimes for intellectual property set out by the Organisation for Economic Co-operation and Development (OECD).
Current Patent Box rules mean pharma companies and others can apply for a lower rate of corporation tax – 10% – to profits earned after 1 April 2013 from their own patented inventions. To qualify, pharma companies must also own or exclusively license-in the patents and must have undertaken qualifying development on them.
But the proposed changes to the UK Patent Box scheme mean that businesses need to scrutinise their R&D activity more closely in order to qualify for future tax relief, says leading intellectual property firm Withers & Rogers.
Michael Jaeger, patent attorney at Withers & Rogers, says: “The amended legislation will bring changes to the way eligible profits are calculated. A new formula for making these calculations, called the R&D fraction, will require businesses to specify all costs associated with their inventions in order to calculate their tax relief.
“This is a significant administrative burden for businesses, particularly those with more complex operating structures where some R&D activity is carried out by third parties or sister companies, whether in the UK or overseas.
“The changes are intended to block profit shifting. However, they could also catch out some larger companies if they fail to take steps to document all related expenditure in order to evidence the fact that activity is substantively taking place in the UK.”
To compensate for the additional administration required to comply with the draft legislation, Withers & Rogers is urging HM Treasury to consider removing the current taper system for Patent Box. Michael Jaeger continues:
“Due to the R&D Fraction, Patent Box is likely to be less beneficial to some companies. Although the current taper system is due to expire in the next tax year, the government should remove it now to make up for the negative impact of the R&D Fraction on Patent Box relief.”
The government’s draft legislation on the UK Patent Box scheme has now been published (as of December 9) and can be read here. Although the consultation period has now ended, HMRC is still keen to receive feedback from companies and their financial advisers – comments on the draft legislation should be submitted by 3 February 2016.
The proposal for the new patent box legislation is available here.
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