Policy paper

Corporation Tax: Patent Box - cost sharing arrangements

Published 5 December 2016

Who is likely to be affected

UK companies which hold and exploit patents, or patent like rights, which claim relief under the UK Patent Box and carry out their research and development (R&D) collaboratively under a ‘cost sharing arrangement’ (CSA).

General description of the measure

The measure adds specific provisions to the revised UK Patent Box rules introduced in Finance Act 2016, covering the case where R&D is undertaken collaboratively by two or more companies under a CSA. The provisions ensure that such companies are treated neutrally if they organise their R&D in this way.

Policy objective

Delivering on its commitment to the G20-Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting project, the government legislated in Finance Act 2016 to amend the UK Patent Box in line with the international framework agreed as part of this project on the operation of preferential intellectual property (IP) regimes, such as Patent Boxes.

The UK was a driving force in creating this framework to ensure that substantive economic activity is required as a pre-requisite for access to all preferential IP regimes, so that they cannot be used for profit shifting. This is done by linking benefits afforded to income generated by IP under such regimes to the R&D expenditure incurred to develop that IP. This helps to level the playing field for tax internationally, preventing unfair tax competition while retaining the ability for countries to attract genuine activity that contributes to growth and prosperity.

As with the original UK Patent Box, the government is clear that such innovative activity should be incentivised under the revised UK Patent Box, whether undertaken independently or collaboratively through a CSA.

Background to the measure

The UK Patent Box was introduced in the Finance Act 2012, effective from 1 April 2013, and was originally announced in the 2010 Corporate Tax Roadmap.

Following agreement on the new international framework, the UK government sought views on its preferred approach for amendments to bring the UK Patent Box in line with this in a consultation document, ‘Patent Box: substantial activities’, published on 22 October 2015. The consultation document stated the government’s aim to include specific rules covering cost-sharing arrangements.

The government published partial draft legislation in December 2015. However, provisions on CSA were not able to be included in the Finance Bill, requiring further consultation to ensure that these complex collaborative arrangements were appropriately addressed under the revised UK Patent Box.

Detailed proposal

Operative date

The measure will have effect for accounting periods beginning on or after 1 April 2017 with periods straddling that date split. It will apply to IP held under a CSA which comes into the arrangement on or after that date as well as IP already held at that date in a CSA which a company subsequently joins.

Current law

Current law is included in Part 8A of the Corporation Tax Act 2010 (CTA 2010).

The rules were extensively modified by Finance Act (FA) 2016 (although for companies making elections applying to periods before 1 July 2016, the previous rules continue to apply, until 2021, to older IP). In particular, section 357BLA of CTA 2010 (introduced by Finance Act 2016) defines a fraction, the R&D fraction, which governs how much of the profit from an IP asset or product can benefit from the UK Patent Box. This depends on how the development underlying the asset or product is carried out.

Proposed revisions

The proposed revisions will apply where the changes to the Patent Box included in FA 2016 have effect:

• the definition of a cost-sharing arrangement in section 357GC of CTA 2010 will be modified so that an R&D fraction can be calculated for IP from which a company benefits under the arrangement
• payments made between participants to a CSA to compensate for periodic fluctuations in contributions, so called ‘balancing payments’, will be set off so that it is the net amount that contributes to the company’s R&D fraction
• where a company acquires an interest in or increases its interest in a cost-sharing arrangement, it will include an appropriate amount of the consideration paid as acquisition cost for the purpose of calculating the R&D fraction, to the extent any IP assets are held within the CSA
• where a company disposes of an interest or reduces its interest in a CSA, an appropriate amount of any consideration received is treated as IP income, to the extent any IP assets are held within the CSA

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
nil	+15	+25	+35	+45

These figures are set out in table 2.1 of Budget 2016 as ‘Corporation Tax: implement agreed patent box nexus approach’, and represent the impact of the whole package of changes introduced in Finance Act 2016. These figures have been certified by the Office for Budget Responsibility and more details can be found in the policy costings document published alongside Budget 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

The measure is not expected to impact individuals, households or to affect family formation, stability or breakdown.

Equalities impacts

Patent Box is a corporate tax relief claimed by companies holding and exploiting intellectual property. As such, the government does not expect that the changes proposed will have any equalities impacts.

Impact on business including civil society organisations

Details of the administrative costs associated with the package of changes introduced at Finance Act 2016 are set out in the ‘Corporation Tax: Patent Box - compliance with new international rules’, published on 9 December 2015.

The new cost sharing provisions are expected to result in a negligible one-off cost to approximately 750 patent holding companies, who will need to familiarise themselves with the guidance and train staff. Companies are also expected to incur negligible on-going costs as a result of applying the different rules regarding cost sharing arrangements.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

It is likely that the changes included in Finance Act 2016 will already generate further enquiries to HMRC from customers and their agents given the new calculation required and potentially in respect of other elements such as the interaction with existing claims (grandfathering) or eligibility more generally. Any additional impact due to the further changes proposed now is expected to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected in CT returns, and through communication with eligible companies. HMRC will continue to engage with the OECD to ensure the legislation is operating as intended.

Further advice

If you have any questions about this change, please contact David Harris on Telephone: 03000 586834 or email: david.harris@hmrc.gsi.gov.uk.