IP advice: Is this the end for the patent box?

But, in early November, the UK and Germany released a joint statement announcing the end of the UK patent box scheme. What prompted this joint statement? Germany argued that the preferential tax treatment of IP in the UK is unfair. Whilst the UK is not the only EU member state to provide a patent box, it does potentially offer the largest tax relief. Germany was also concerned that the patent box does not require the R&D underpinning an eligible patent to have actually taken place in the UK. Consequently, in addition to the legitimate effect of stimulating commercialised innovation, the patent box has the potential to act as a tax haven for multinational companies with R&D operations elsewhere in Europe. What if the patent box closes? Among other things, the joint statement included a proposal to close the patent box scheme to new entrants as of June 2016. We understand that 'new entrants' refers to businesses that have not previously used the patent box, rather than to new patent rights being relied upon within the scheme after this date. Those already making use of the patent box by this date can therefore continue to take advantage of the current tax regime until June 2021, at which point it will be abolished. It had been hoped that the Chancellor's Autumn Statement (3 December 2014) would have provided additional details about these changes. However, it seems likely that further clarity on the patent box (and other proposals) will be deferred to the 2015 budget, leaving some uncertainty in the meantime as to the fate of the patent box and what replacement scheme might follow it. We expect the most likely outcome will be a new scheme enabling a reduced base rate of tax closer to 15%, rather than the 10% of the current scheme, as this is more in line with IP tax breaks elsewhere in Europe. It is also likely that such a scheme will require the R&D underpinning a qualifying patent to be conducted in the UK. Such a new scheme would not only level the playing field in Europe for multinationals, but would also benefit UK SMEs. It also appears to be in line with the Chancellor's actions to help SMEs to enter into or expand their R&D activities by improving R&D tax credits from 1 April 2015. What does this mean for UK businesses? The loss of the existing patent box could reduce the incentive for SMEs in particular to take the extra step of protecting their IP. Because interest in the patent box has only just started to take grow, tax returns for the periods covered by the scheme have begun to be completed and provide a direct illustration of its benefits. We therefore believe that it is important for the Government to announce a replacement scheme as soon as possible. What can businesses do now? Businesses which already have a patent or patent application whose subject matter covers at least some aspect of one of their products should already be investigating whether to make use of the patent box. But they now have a further incentive to do so before the gates are shut on the current scheme. For those businesses that do not already have a patent or patent application, it's worth remembering that, although a patent represents innovation, that innovation can be specific to the features of your product, rather than being generalised or groundbreaking in order to target numerous competitors. Consequently, it is possible to file a patent application narrowly tailored to particular aspects of your product with a view to simplifying and expediting the patent grant procedure. This, in turn, will allow you to benefit from the patent box scheme more quickly. This approach may be all the more relevant now that the clock is ticking. Further detailed information is available by contacting a Partner at D Young & Co LLP by visiting www.dyoung.com.