24/07/2014

By Jon Sutcliffe, Kingston Smith

In part 1 of this series on Patent Box we covered what it is and where it is available. Part 2 covered how it is calculated and what processes are involved. In this final part, we give our view.

1. Have you advised anyone not to elect into the regime?

I haven’t as yet advised anyone not to elect into the regime but there certainly might be cause for it, depending on the circumstances. If, for example, a patent applied to a loss leader product, you might not want to enter the Patent Box.

Why would this be a negative? Any Patent Box losses incurred in that initial period will reduce any future profits derived from the patent which would qualify for the Patent Box. As such, the relief on these profits would be reduced as a result of the included losses and so it wouldn’t necessarily benefit the company to elect into the regime. In this circumstance, it might be prudent to advise against electing into the regime, although we haven’t seen this as yet.

2. Do you see changes to the legislation down the line?

Not in the short to medium term as we’re currently in the middle of a 4 year phasing-in period, with full relief not due to hit until 2017.

Saying that, within the EU there is some consternation towards the regime. Germany, in particular, believes it is a competitively unfair regime and they have referred this to a number of various bodies within the European Commission.

A similar issue arose with the Netherlands and their similar scheme, whereby Germany opposed and referred it on the grounds that it was competitively unfair. The Dutch regime was changed as a result, although this was mainly cosmetic and held little or no bearings on the fundamental mechanisms of the scheme.

We may find therefore, that changes are made to the legislation to keep our European counterparts appeased. These changes, however, will most likely also be cosmetic and not make much difference to the underlying benefits of the regime.

3. Do I need to think about anything else?

One other major thing to consider is when the company is also claiming other reliefs, such as R&D tax credits or the recently announced Video Games tax relief. These amounts are ‘added-back’ onto the proportion of qualifying income, in a separate calculation, so that they don’t affect your Patent Box claims and discourage more investment in innovation.

In fact, quite conversely, you may be penalised if you don’t continue commercial activities that qualify for relevant tax relief or credits e.g. if you received relief for R&D and then entered into the Patent Box, the government will penalise you if your R&D spend decreases by more than 25% in comparison to the previous 4 years.

TOP TIP: make sure you properly assess what your company is claiming for so that you can offset against any other claims, ensuring your receive the best tax relief possible.