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Markel Tax

10 Jun 2019

End of new entrants to the Grandfathered rules in Patent Box Claims

Taking inspiration from similar schemes from around the world, the UK patent box scheme was phased in from 1 April 2013. This generous tax relief enables companies to effectively obtain a 10% corporation tax rate on profits attributable to qualifying intellectual property (IP). The biggest change to the scheme since its inception was the introduction of ‘new rules’ in 2016; covering both the nexus between R&D expenditure and profits benefiting from the reduced rate, and transitional rules.

This month marks the end of availability of the old scheme to new entrants. The new rules took effect from 1 July 2016, and so companies with an accounting period straddling this date were eligible to back-date election into the scheme under so-called grandfathered rules which could be used until 30 June 2021. In practice, accounting periods ending 31 May 2017 were the last to be able to elect in to the scheme, so new applicants to the patent box legislation (as well as newly registered patent streams) must now claim under the new rules.

With this important change in legislation now applying to all new claimants, a comparison of the main differences between the grandfathered and new rules is important to ensure that claims are accurate and contain all the necessary information. The two significant modifications to the legislation are the introduction of the R&D (Nexus) fraction and the necessitation of IP streaming.

Nexus Fraction

Whilst the undertaking of development activity was always a qualifying criteria for patent box, it previously was only required that at least one member of a group of companies met this condition. With the nexus fraction in place, there is an additional layer of complexity regarding the treatment of R&D expenditure.

The nexus fraction compares the level of R&D costs incurred within a company and with third party subcontractors, against the level of R&D cost incurred on the acquisition of IP rights or on related party subcontractors. If a higher proportion of the total R&D expenditure is incurred within a related company or on the acquisition of IP rights, the amount claimable under patent box will decrease.

Unfortunately for claimants, there are a substantial number of additional factors to consider when computing this fraction, including historic R&D spend and company structure analysis, complicating this new addition to the patent box calculation. In particular, groups of companies which could previously claim may no longer be able. A common group structure is to have an IP holding company which licences the rights to trading members. Under the new rules, the lack of direct R&D activity in the holding company would reduce the fraction to zero and thus provide no tax relief.

Although the grandfathered scheme will continue until 2021, claimants will be expected to have detailed records dating back to 1 July 2016, so even companies that have claimed historically, it is important to be aware of these rules so the transition to the new rules is seamless.


The old patent box permitted two methods of determining the IP income from which to calculate the tax relief. The standard method apportions the overall trading profit by the same ratio as the income from IP against total income. This is a straightforward calculation but can be less beneficial than the second method if there are higher profit margins associated with IP-related products. The second method is streaming, whereby the income and expenditure is split, line-by-line, into either IP or non-IP streams.

Under the new rules; each IP stream must be further broken into relevant sub-streams by IP asset, as must the income and expenses that relate to them. Whilst this is a more complex task – especially for those companies claiming under both the grandfathered and new rules – this enables a more granular examination of the expenditure, potentially increasing the relevant costs claimable under the scheme.

Whilst there is considerably more work involved in using this method to compute patent box claims,  Markel Tax believes that this rise in detail could increase the value of a patent box claim, if undertaken correctly.

As part of the patent box claim our team will go through all of the company’s patents, income and expenditure – to determine the best methodology of categorisation (for streaming). We will also examine the company structure and spending to ascertain how the nexus fraction could impact your claim, and how to minimise its impact in future years.

For further information on how the new rules could affect you or your clients, and for help with Patent Box claims please contact us on 0114 236 4457 and ask for Neil Bowden.
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10 Jun 2019

Grant Funding and R&D Tax Interaction