Spurred on by the departure of a number of high-tech companies from the UK, the previous Labour Government announced in 2009 a new low-tax initiative called the ‘Patent Box’, designed to encourage innovation and attract the R&D programmes of technology companies. Following a lengthy drafting and consultation period, this initiative came into force in April 2013.
At a (very) high level, the Patent Box offers 10% corporation tax on income linked to Patents registered in the UK or EU, subject to certain qualifying criteria put in place to protect the system from abuse.
So far, this initiative has been generally welcomed by the business community. Earlier this year, GlaxoSmithKline was reported to be planning to move 150 overseas research projects to the United Kingdom, in order to benefit from the initiative.
Will this impact M&A in the UK?
While IP assets are one of many issues to consider in any M&A transaction, the chance to lower corporation tax rates on certain global income streams to 10% is an attractive prospect.
Furthermore, the Patent Box initiative has been structured to allow both domestic and foreign companies to acquire either the qualifying IP or the holding company, without forfeiting the tax benefits.
Change of Control Clause
However, before companies rush to acquire patent holding targets, there is a change of control provision to take into account. Whilst the target may have previously qualified for the lower tax rate pre-transaction, post-transaction the target (or another acquirer-group company) must fulfil qualifying criteria, for example by taking an active role in the development or management of the IP for at least 12 months following the acquisition, before it can benefit.
Therefore, it is important that companies acquiring qualifying patent IP are aware of these requirements and plan a suitable post-transaction R&D strategy that fulfils the criteria.
Cheaper Capital Gains on Patents
Larger corporates looking to hive off IP through Special Purpose Vehicle (SPV) structures need to be careful. Under the UK tax code, HMRC will seek to claw-back capital gains tax on intangible assets (registered post-2002) sold through SPV structures, a ‘de-grouping’ charge.
However, this charge can be reduced from the 23% rate to the 10% Patent Box rate if the SPV can be shown to have carried on ‘qualifying development’ on the IP prior to and following its disposal…which might be a little tough for a holding company.
- The Patent Box will allow companies that meet the criteria to pay as little as 10% on global revenue derived from UK and EU patents. This initiative forms a major part of the UK Government’s strategy to attract and encourage technology companies within the UK.
- However, the qualifying criteria are complex, which hinders the ability of smaller enterprises to capitalise on this specific initiative. Smaller companies may lack the resources to perform the necessary due diligence to confirm any benefit from electing into the Patent Box regime.
- Furthermore, it is of little use to the highly innovative start-ups in the technology sector, who may not be paying any tax at all.
- Nevertheless, for those domestic and foreign companies with the resource to identify potential acquisition targets that do or could qualify for preferential tax treatment, there is an attractive route to a lower tax rate.