Patent Box – possible action required pre 2 January 2016

Mon 14 Dec 2015

The draft Finance Bill 2016 includes provisions to amend the existing patent box regime within Part 8A of CTA 2010, to bring it in line with the ‘nexus’ approach.

Due to the timing of the consultation and the issuing of the draft Finance Bill, these draft provisions do not reflect any responses from the consultation process. They also lack some detail in relation to certain aspects of the R&D fraction (previously referred to as the ‘nexus fraction’ within the consultation document). HMRC have confirmed that a revised draft of these provisions will be released in early 2016, to reflect these, along with any other comments which they receive on the draft provisions themselves.

Transfers from connected persons

Although these provisions are in a very draft form, consideration does need to be given to the proposed changes now, as in some cases, action will be required before 2 January 2016 in order to maximise relief.

In broad terms, the general rule is that any IP which ‘exists’ before 1 July 2016 can continue to benefit from the existing patent box regime up to 30 June 2021 (the full grandfathering provisions). This is subject to a claim been made within the appropriate time to bring the IP within the existing patent box regime. 

For this purpose, ‘exists’ refers to the priority date for the patent (i.e. the effective filing date) or, in cases where IP has been assigned or an exclusive licence has been granted to the company, the date of that assignment or grant. However, this general rule does not apply where IP is assigned or an exclusive licence is granted to a company by a ‘connected person’ on or after 2 January 2016 unless the IP was already within the UK patent box regime (or a similar regime outside of the UK) before the assignment or grant. Where this general rule does not apply, the income from such IP will only benefit from the existing (more beneficial) patent box regime up to 31 December 2016.  The draft legislation achieves this at new s357BP CTA 2010 by including such connected person transfers within the definition of ‘new qualifying IP rights’, along with IP otherwise created on or after 1 July 2016.

Those transfers affected from 2 January 2016 are set out in s357BP(6) and (7) and where the transferor is a company which is connected with the acquirer, or is not a company and is connected with the acquirer.  For this purpose, ‘connected person’ has the meaning of section 1122 CTA 2010. The explanatory notes state that the inclusion of transfers from individuals is intended to prevent the acquisition of IP indirectly from a connected company and suggest that this definition may be extended for this purpose in the final version of legislation. 

Possible action required now

Consideration therefore needs to be given as to whether any IP in a group which is not currently within a patent box regime is either:

• moved to a connected company before 2 January 2016, or
• brought into a patent box regime by the current owner, so that a transfer can be made before 1 July 2016

so that it can benefit from the full grandfathering provisions.