Update from Richard Turner, Managing Director, Tax & Innovation, FTI Consulting

Patent Box is a key initiative in making the UK competitive for innovative high tech companies, driving growth and investment in the UK and creating high value jobs. The incentive, which reduces the tax on profits to 10%, has proved popular, and HMRC has seen a positive uptake with 639 companies receiving a benefit totalling £335m to date. In October a consultation was launched by HMRC around proposed changes to the design of the UK Patent Box to comply with a new international framework for preferential tax regimes.

New proposals – the ‘modified nexus’ amendment

The principle underlying the changes are that for a business to benefit from Patent Box, it should have directly undertaken R&D expenditure to develop the IP from which it is generating income. This is implemented through a ratio known as the ‘nexus fraction’ – the proportion of profit from the IP which can be included under the Patent Box.

Under this fraction, the taxpayer’s ‘own’ direct R&D expenditure plus any that has been subcontracted to an unrelated party is the numerator (qualifying expenditure), while the denominator is comprised of qualifying expenditure plus any R&D subcontracted to a related party and any acquisition or licensing costs.

An example: if a company made profit Y from an item of IP and carried out 70% of its R&D, the nexus fraction would be 0.7 and the profit to which the 10% rate would apply would be 0.7 x Y.

There will be a separate stream for each different parcel of IP. Companies will need to track expenditure on developing IP as well as the income and expenditure needed to establish a profit figure. There will be a nexus fraction for each stream before the separate profit figures are added and the Patent Box additional deduction calculated from the total.


The consultation will run 22 October – 4 December 2015. HMRC plans to publish draft legislation in December informed by the consultation process. A response to the consultation will be published in spring 2016, along with any necessary changes to be made to the draft legislation. The Government will propose legislation in the 2016 Finance Bill to amend the current Patent Box rules with effect from 1 July 2016 and this consultation seeks input on the changes.  This is a very tight timescale and input into the process is encouraged in order to ensure that, as far as possible, the Patent Box continues to provide a valuable incentive.

To find out more about the proposals and contribute to the consultation, go to https://www.gov.uk/government/consultations/patent-box-substantial-activities