Intellectual property taxation in the United Kingdom

United Kingdom

BEPS

UK

Qualifying taxpayers

  • Resident companies
  • Domestic permanent establishments (“PEs”) of foreign companies
  • Foreign PEs of resident companies subject to tax in the jurisdiction providing benefits
  • Individuals operating enterprises
  • UK tax resident companies
  • UK PEs of non-UK tax resident companies

Qualifying IP

  • Patents;
  • Equivalent rights: utility models (e.g. “petty patents”, “innovation patents”, “short term patents”), IP assets that grant protection to plants and genetic material, orphan drug designations, and extensions of patent protection ;
  • Software protected by copyright ;
  • Non-patented assets owned by SMEs- certified as obvious, useful and novel such by a competent government agency independent from the tax administration, for taxpayers that have no more than EUR 50 in global group-wide turnover and that do not earn more than EUR 7.5 million per year in gross revenues from all IP assets, on average over a five-year period (SMEs)

 

  • Patents granted by the UK Intellectual Property Office (UKIPO);
  • Patents granted by the European Patent Office (EPO);
  • Specified EEA rights corresponding to UKIPO and EPO rights;
  • Supplementary protection certificates for medicinal products and plant protection products;
  • UK and EC plant breeders and plant variety rights; and
  • Certain UK and European marketing and data protection rights

Modified nexus approach (or other approach)

  • Qualifying income = [(qualifying expenditure + up-lift) / Overall expenditure] x IP income
  • Jurisdictions could treat the nexus ratio as a rebuttable presumption 
  • Qualifying income = [(qualifying expenditure + up-lift) / Overall expenditure] x IP income
  • Rebuttable presumption under exceptional circumstances where higher than 32.5% and a notification must be given to the UK tax authority.

Determination of the uplift

  • 30% of qualifying expenditure, capped at  the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing i.e. nexus ratio cannot exceed 100%
  • 30% of qualifying expenditure, capped at the sum of (i) acquisition costs and (ii) expenditure for related-party outsourcing i.e. nexus ratio cannot exceed 100%

Qualifying expenditure

  • Expenditure directly connected to the IP asset; exclusion of interest payments, building costs, acquisition costs.
  • Expenditure for general and speculative R&D taken into account on a pro rata basis
  • Expenditure included in the nexus calculation at the time they are incurred (irrespective of the accounting and tax treatment)
  • Cumulative approach i.e. expenditure incurred all over the life of the IP asset
  • Qualifying expenditure includes only expenditure relating to: staff, externally provided workers, software, consumables, payments to subjects of clinical trials.
  • Expenditure can be incurred i-house or by a non-connected party on R&D (this can be overseas, but an overseas branch that elected into the branch profit exemption does not qualify).
  • Acquisition expenditure on qualifying IP also does not qualify under the modified nexus approach..
  • Expenditure incurred 

Person carrying on the R&D and the place where the R&D is carried on

R&D carried out by:

  • the IP owner (including by a foreign PE provided that it is operating at the time the IP income is earned)
  • unrelated parties (outsourcing) irrespective of their location; jurisdictions may narrow the scope scope to certain types of unrelated parties and provide for a cap of unrelated party outsourcing expenditure; jurisdictions outside the EU could include R&D activities undertaken by resident related parties 

R&D activities can take place in either:

  • the company using the patent box;
  • a company within the group (subject to certain conditions); or
  • where a company acquires another company and R&D work is carried out in the second company.

The place where these companies carry on the R&D is not specified. If the other conditions are met then the R&D can take place in any country.

Overall expenditure

  • Qualifying expenditure
  • + IP asset acquisition costs : include expenditure incurred to obtain rights to research and, in the case of licensing: royalties and license fees (cumulative approach); jurisdictions outside the EU could include R&D expenditure incurred prior to acquisition in case of acquisition of a taxpayer that incurred R&D expenditure in the jurisdiction
  • + expenditure for related-party outsourcing (cumulative approach)

This would be the sum of all the qualifying expenditure as listed at question 5.

Eligible income

  • May include royalties, capital gains and other income from the sale of an IP asset, and embedded IP income from the sale of products and the use of processes directly related to the IP asset
  • Royalty income
  • Profit arising from the sale of IP assets
  • Profit from embedded IP
  • Profit from the use of processes

Profit from IP infringement and other compensation Relevant IP income is the income derived from the exploitation of qualifying IP rights including sales income, licence fees, proceeds of sale

Overall income

  • Net income from the IP asset i.e. gross IP income – IP expenditure allocable to IP income for a given tax year
  • Allocable IP expenditure: determined based on ordinary domestic tax law provisions, on a yearly basis 

Under the formulaic method, the total gross income is the sum of revenue, compensation, adjustments on a change of accounting basis, proceeds from intangible fixed assets and the profits from patent rights.

Relief mechanism

  • Exemption (implicit), or
  • preferential tax rate

Special tax rate

Cost of the entry into the box

  • No indication

There is no cost to enter the UK Patent Box, entry is achieved on an election basis.

Effective tax rate

n/a

The deduction is worked out using the following formula:

  • RP x ((MR – IPR) / MR)

where:

  • RP is the relevant IP profits of the trade of the company (RIPP)
  • MR is the main rate of corporation tax.

IPR is 10% (the special IP rate of corporation tax).

Administrative

  • Tracking of expenditure, IP assets and income; jurisdictions may allow tracking by products or families of products arising from IP assets if in line with business model
  • Documentation requirements 

Entry into the UK Patent Box regime is made on an elective basis.

Other special features of the regime

  • Jurisdictions may as a transitional measure allow taxpayers to calculate the nexus ratio based on a 3 or 5-year rolling average
  • Jurisdictions may provide for grandfathering rules

Grandfathering Rule:

  • The UK had patent box rules in place before the BEPS-driven patent box rules were introduced. The BEPS-driven patent box rules were introduced in the UK by Finance Act 2016.
  • Finance Act 2016 contains grandfathering rules for companies that used the old patent box in the UK where a company satisfies the following conditions:
    • The company had elected to use the old patent box; and
    • The IP in the patent box exists at 1 July 2016.
  • Where these conditions are satisfied, the Finance Act 2016 allows a company to use the old patent box rules until 1 July 2021.
  • Where a company qualifies to use the old rules, the old rules are likely to be more advantageous to taxpayers in the UK than the new rules.