Update on recent Patent Box developments

19 October 2015

Following publication of the Organisation for Economic Co-operation and Development (OECD) Action 5 report on 5 October 2015, it has been confirmed that the benefit from preferential intellectual property (IP) tax regimes, such as the UK Patent Box, should be linked to the amount of qualifying research and development (R&D) carried out by the taxpaying company. This link is referred to as the ‘modified nexus approach’.

The OECD report sets out a series of guidelines, which preferential IP tax regimes will have to comply with by 1 July 2016.  The UK Patent Box regime and other schemes, such as those in the Benelux countries, will have to be modified to comply with the OECD’s guidelines. 

The OECD’s guidelines will provide a more consistent approach across jurisdictions. This may make it easier for multinationals availing of such schemes in a range of countries. The agreement reached with the OECD will also give companies greater confidence in the longevity of such schemes.

IP assets

In addition to patents, the OECD has given countries the freedom to extend preferential IP tax regimes to include IP assets functionally equivalent to patents, such as utility models. Utility models are not available in the UK, but it is possible that the UK could extend the Patent Box scheme to include utility models from other countries, such as Germany. 

Supplementary Protection Certificates (SPCs), which fall within the existing UK Patent Box scheme, are also considered by the OECD to be functionally equivalent to patents.

The OECD will also permit countries to consider copyrighted software as being functionally equivalent to patents, although we do not yet know whether the UK will extend the Patent Box scheme to include copyrighted software. In any event, European patents may be obtained for computer programmes, provided there is a technical effect.

The OECD has confirmed that Trademarks may not be included in a preferential IP tax regime.

Nexus ratio

The nexus approach applies a ratio to the overall income from the IP asset to arrive at the income receiving tax benefits. The nexus ratio is the qualifying expenditures incurred to develop the IP asset (excluding related party outsourcing costs and IP acquisition costs) as a fraction of the overall expenditures incurred to develop the IP asset (including IP acquisition costs and total outsourcing costs). A maximum uplift of 30% may be applied to the qualifying expenditures, provided the nexus ratio does not exceed 100%. 

The nexus approach is cumulative such that the “qualifying expenditures” include all qualifying expenditures incurred by the taxpayer over the life of the IP asset and that “overall expenditures” include all overall expenditures incurred over the life of the IP asset. These numbers will therefore increase every time a taxpayer incurs expenditure that would qualify for either category. The proportion of the cumulative numbers will then determine the percentage to be applied to overall income earned each year.

To determine the qualifying expenditures, companies will need to trace their R&D to each patent, product or product family (using the lowest level practically possible). This expenditure will also need to be tracked over time due to the cumulative calculation of the nexus fraction. The nexus ratio is however a rebuttable presumption that companies may challenge in exceptional circumstances and if they can show that it is unfair.


After 30 June 2016 no new entrants (whether new taxpayers or new IP assets) will be permitted in any existing IP regime not consistent with the nexus approach. Therefore, existing IP regimes will continue to be available for new entrants until 30 June 2016, although mandatory information exchange will be required for new entrants to regimes after 6 February 2015. The existing IP regimes must however be abolished by 30 June 2021. New entrants wishing to avail of existing regimes will need to fully meet all substantive requirements of the existing regime and have been officially approved by the relevant tax administration before 30 June 2016. New entrants may however rely on pending patent applications, which eventually grant after the 30 June 2016 cut off. 

IP assets transferred into the UK before 1 July 2016 may qualify for the existing regime under the grandfathering provisions. However, the transfer would need to take place by 1 January 2016, if the IP asset is transferred from a country without a preferential IP regime.

Next steps

There will be a consultation before draft legislation for the new UK regime is published in December 2015. There will be a further consultation before the new UK Patent Box regime is included in the Finance Bill 2016, which is planned to take effect from July 2016. 

Haseltine Lake will contribute to the consultations and we will send updates with news of developments as the new Patent Box legislation takes shape.


In cases where R&D is being conducted outside the UK, we recommend that patent applications are filed as soon as possible (if not already) and that the current Patent Box scheme is elected into. Companies may otherwise wish to maximise qualifying expenditure in the UK to increase the nexus ratio. Companies may also need to consider transferring ownership of IP to the UK taxpaying entity.

Haseltine Lake and Patent Box

Haseltine Lake was closely involved in HM Government’s original Patent Box consultation process and is one of the very few Patent Attorney firms to have helped shape the current legislation. As a result, we have a deep understanding of the current regime and of how UK companies can benefit from it. 

Haseltine Lake can review your IP portfolio and your patenting strategy to ensure that relevant patents within your existing portfolio are identified and progressed and that plans are in place to patent key product technologies in future in order to benefit fully from the Patent Box. We can also advise on the range of inventions that can be patented, which may be broader than you think.

Andrew Dowling

Andrew Dowling


Our Expert
Andrew Dowling
Andrew Dowling
Location: London (UK)

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