Post-Brexit Innovation and the Patent Box Regime

A salient motivation behind the UK’s Patent Box regime – and intellectual property programmes just like it around the world – was to encourage companies to make a profit on their patents and, in doing so, to boost innovation.

The original iteration of the regime saw UK companies pay a reduced 10 per cent corporation tax rate (compared to the usual 20 per cent) on income that stemmed from the commercial exploitation of patents.

It was an approach that seemed to be working not just here in the UK but in other parts of the EU countries as well.

Patent Box boost to innovation

Last year, applications at the European Patent Office originating from the UK were up by 5.7%. British companies and innovators filed 5,037 patent applications, the highest number in five years.

The regime has not been free from criticism, however. Commentators cited the risk that such approaches constitute harmful tax practice when companies take advantage of the benefit without meaningfully contributing to a country’s store of knowledge or technology. In other words, critics charge that there is no strong link between the tax benefits and in-country research and development.

Changes afoot

Indeed, during its review of IP regimes, the OECD’s base erosion and profit shifting project characterised the UK’s approach as ‘harmful and open to abuse’. In light of the criticism, a modified Patent Box regime is being phased in.

The original parameters are now closed to new entrants, and tax benefits are being limited to the percentage of UK R & D undertaken as a proportion of global R & D. The change is being effected through the adoption of a so-called ‘nexus fraction’, which measures this proportion and will see companies necessarily tracking and tracing R & D expenditure on all patents from 1 July 2016.

Post-Brexit Patent Box?

Because the Patent Box regime is incorporated within domestic UK tax law, Britain’s departure from the EU doesn’t have a direct impact on its application. Still, the rules around relief are influenced by the European Commission in some ways.

For instance, the sort of benefits available to SMEs relies on the EU definition of ‘SME’, and SME R & D relief falls under EU state aid. As such, any changes require EU approval.

Additional EU restrictions such as the state aid cap and limits on relief for projects that already benefit from state aid were imposed upon the UK, and it is possible that these restrictions would be lifted following an official exit.

Positive for innovation

If anything, the post-Brexit outlook for innovators is positive: the UK can ultimately regain control over the framework for SMEs without EU approval.

Even with an understanding that the government’s post-Brexit to-do list is rather outsized, we can hold on to hope that legislators will take advantage of any newfound flexibility to increase the scope of the regime as far as it pertains to SMEs and thereby provide incentives to early-stage companies that desperately need them.

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