What’s BEPS got to do with it?
The OECD report on Base Erosion and Profit Shifting (“BEPS”) suggested changes to patent boxes.
Primarily, the report required a link between the place where the R&D activity is carried out and the jurisdiction providing the relief.
In other words, broadly, if the UK is offering a Patent Box relief then the research and development activity underlying it should take place in the UK as well.
The BEPS report resulted in new legislation in FA2016 with changes taking effect from 1 July 2016. A tale of two regimes
The problem is the changes created two main regimes:
Old or Pre 2016 rules: for IP brought into the patent box for accounting periods starting before 1 July 2016; and New or Post 2016 rules: for IP brought into the patent box for accounting periods commencing after this date
Further, there is a bit of a middle ground as:
A Company subject to the old rules and can elect out of the old rules in to the new ones; and A Company subject to the old rules but with new IP for accounting periods after the 1 July 2016 date will have to prepare computations under the new rules for that new IP.
We only have to put up with this until July 2021 when the old rules and the transitional rules are obsolete and all Companies are within the post 2016 rules on a mandatory basis.
Calculating the relief
So, a bit more on the different regimes.
The significance of determining which rules the Company is subject to is important in deciding which that the method of calculation we use:
Pre 2016 rules – we had a simple pro/rata calculation (‘Standard or Apportionment Calculation’) between relevant IP income and non-IP income in calculating the PB profits; Post 2016 rules: we need to stream each piece of IP; and need to apply an ‘R&D’ fraction – introduced by BEPS prompted amendments
Which regime – questions to ask ourselves
As such, we need to ponder a handful of questions as to which set of rules we apply:
Did the AP commence before 1 July 2016? Is the Company a new entrant or an old entrant? If the Company is an old entrant: Has it made an election in to the post 2016 regime? Does it have any new IP? Did the AP commence on or after 1 July 2021?
Old entrant v new entrant
There is a distinction between old entrants and new entrants.
First period for which the Company’s patent Box election (or most recent election) commenced on or after 1 July 2016; OR The Company makes an election to be treated as a new entrant
Not defined in legislation – but covers anyone who is not a new entrant: Most recent patent box election was made for a period commencing before 1 July 2016; AND No election made to be treated as a new entrant
New IP is: New patent New grant or assignment of an exclusive licence or assignment of a patent In general, new IP is treated in same way as a new entrant As such, an old entrant with new IP will need to apply the methodology of the post 2016 rules to its new IP.
If you have any queries about this article, or patent box in general, then please get in touch.