The group has indicated that it is going to review the UK’s regime to determine whether it does, in fact, contravene the code. HM Treasury has, last week, given evidence to the group, arguing that the UK's regime is sufficiently tightly defined that it is not in contravention.
First, the UK Patent Box regime is not a State Aid
The Patent Box enables companies with qualifying patents to tax the profits arising from those patents at a reduced rate of 10%. The regime is being phased in, however, and the full reduction in the tax rate will not be effective until 2017/18. A lot of the criticism comes, I believe, from the fact that income from patents in existence before the regime’s commencement date of 1 April 2013 can be included within the box. The concern appears to be that this gives relief without necessarily encouraging any further innovation. Also, there seems to be some concern that the regime applies to profits arising from products that contain a qualifying patent, rather than the direct profits from the patent itself. There are also concerns that the “development requirement” rules mean that a group can acquire a company that owns patents it has developed, and then transfer those patents to another group company and obtain patent box relief.
The reality is that a number of compromises were necessary to design a Patent Box that was going to be workable and attractive to a broad range of businesses without being unacceptably costly.
In the meantime, several companies have already asked me whether they should continue with (or indeed, start) preparing claims for relief under the UK regime given that it might be ruled in contravention of the code of practice. There are a couple of quite important points to note here.
First, the UK Patent Box regime is not a State Aid. This is important because State Aids need approval from the EC before they can be introduced. The SME R&D regime is an example of a State Aid. Whenever the UK Government wishes to make changes to the regime it has to get those changes approved by the EC before they can become effective. As I say, the Patent Box is not a State Aid so no approval is needed. The legislation is already in effect and Parliament would need to change the law in order for it to be withdrawn.
Second, even if it does conclude that the code has been breached, the Code of Conduct Group cannot actually force the UK to change its domestic tax law since the code of conduct is not a legally binding agreement. All the group can do is to exert pressure in an attempt to persuade the Government to make changes. That pressure is most likely to come through the Economic and Financial Affairs Committee of the EU (if it comes at all).
HM Treasury has already made its position quite clear, it does not agree with the Code of Conduct Group’s initial suggestions in this regard. Indeed, the Government feels that the UK’s patent box regime is very tightly defined and imposes quite strict eligibility criteria. HM Treasury’s official view is that “The government is confident that the UK’s Patent Box regime does not breach the EU Code of Conduct Group’s criteria; it is more tightly defined and imposes tougher eligibility criteria than other similar measures in operation that have previously been considered by the Code Group, for example those in France, Spain, Belgium and the Netherlands.”
The UK government has made it clear that it sees the Patent Box as an important part of its overall corporate tax strategy. Given that position, together with the clear statements already made by the Treasury, I really cannot see that it will be easily persuaded to make significant changes to the regime, let alone withdraw it.
My recommendation, therefore, is to continue with preparations for making patent box elections. Indeed, if you haven’t already started thinking about it, why not?
The complete series of economia blogs can be read here
David O’Keeffe, trading as Aiglon Consulting, specialises in advising on the taxation of innovation. He has his own Blog and can also be followed on Twitter