You are here: Home > News > UK Government publishes draft legislation on ‘Patent Box II’

UK Government publishes draft legislation on ‘Patent Box II’

1 January 2016

Patent Box is a UK tax scheme whereby UK companies pay a reduced rate of corporation tax on profits generated from patented technology.  Shortly after the scheme came into effect in April 2013 it came under attack from foreign governments and this led to the Organisation for Economic Co-operation and Development (OECD) issuing its requirements for preferential tax regimes for intellectual property, such as the UK’s Patent Box, earlier this year.

In response to the OECD’s work, the UK Government issued a consultation in October 2015 to bring the Patent Box in line with the OECD’s framework.  Following the close of that consultation the Government has now issued draft legislation which will implement the required changes to the Patent Box scheme.  The legislation will form part of the Finance Bill 2016.

The main points of the legislation are as follows:

– the existing scheme will remain open to current participants and those electing in to it by 30 June 2016 for patent applications filed by 30 June 2016.
– those current participants will need to move to the new scheme after 30 June 2021.
– for new entrants to the scheme from 1 July 2016 and for patent applications filed after that date, companies will only be able to benefit to the extent of their subcontracted non-related parties’ ‘substantial activities’, i.e., R&D expenditure.
– similarly relevant IP acquired on or after 2 January 2016 may only receive the benefit of the existing Patent Box until 31 December 2016.
– where R&D is undertaken by other companies on behalf of the beneficiary company, the extent to which the company can benefit will be reduced by an ‘R&D Fraction’ (referred to as the “Nexus Fraction” in the consultation document).
– where R&D expenditure is subcontracted to non-related (i.e., non-group) third parties, this will not reduce the R&D Fraction.
– where R&D expenditure is subcontracted to related third parties (e.g., other companies in the same group) and where patent rights are acquired, this will reduce the R&D Fraction.
– R&D expenditure will need to be allocated to IP assets (e.g., patents), products or product families – this will create an increased burden on companies to “track and trace” expenditure and profits at these levels

The draft legislation and explanatory notes can be found here. HMRC welcome comments on the draft legislation by 3 February 2016.

For further information about the Patent Box, please click here.


Michael Jaeger
Electronics, Computing & Physics Group

If you require further information on anything covered in this briefing, please contact Michael Jaeger (; +44 207 940 3600) or your usual contact at the firm.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Withers & Rogers LLP, December 2015