Confluence Tax LLP
Thepatentboxin
practice
1
Thepatentboxinpractice
Fromstartup
Recordkeeping
Makingaclaim
QualifyingIP
Rights
Active
ownership
Identifyasset/
productor
productfamily
TrackR&Dand
acquisitioncosts
Confluence Tax LLP
Election
Calculating
relevantprofits
Streamincome
andexpenditure
Deductroutine
return
Additionaltax
deduction
Addtherelevant
profitstogether
Calculate
deduction
Deduct
marketingasset
return
Multiplyby
nexusfraction
2
Thepatentboxinpractice
Confluence Tax LLP
Recordkeeping
Identifyasset/
productorproduct
family
TrackR&Dand
acquisitioncosts
• Purposeistoidentifyqualifyingandnon-qualifying
spend
• Tracetothelowestlevelpractical
- Individualpatent
- Product
- Familyofproducts
• Likelytobeprojectlevel
• Whatif:
- Expenditureisrelevantformultiple
projects
- Projectabandoned
• Qualifyingspend
- Staffandexternallyprovidedworkercosts
- Softwareandconsumables
- Paymentstosubjectsofclinicaltrials
- 3rdpartysubcontractorcosts
• Non-Qualifyingspend
- Acquisitioncosts
- Relatedpartysubcontractorcosts
• Thefractioniscumulativefor20years
- NewentrantandAPbeginsbefore1July2021–
Trackfrom1July2013
- Allothers– Trackfrom1July2016
3
Confluence Tax LLP
Thepatentboxinpractice
Makingaclaim
• Twoyeartimelimit– fromtheendoftherelevant
accountingperiod
• Electingintooearlyreducesbenefits
• Canelectout– but5yearsbeforere-electin
Election
Accountingperiod
beginningbefore1
July2016
• Electedin– Oldrulesapplyuntil2021
• Notelectedin– Canonlyelectintonewrules
• APended31December2016,makeelectionby31
December2018
Electinif:
Don’telectinif:
-
-
-
Nexusfractionwillreduce
benefit
Recordsincomplete
Lossmaking
Nexusfractionwillnotrestrict
benefit
Anewassetafter1July2016willbeinthenewrules(withexceptions)
4
Confluence Tax LLP
Whathappensif….
Somescenarios
5
Confluence Tax LLP
…ThecompanyhasoldandnewIP
Separateasset/product/productfamily
• Newrulesapplytothenewasset
• Companywillhavean‘oldIPrights’sub-streamandnewIPrightssubstream(s)
Sameproduct/productfamily
• Treatedaspartofthe‘old’regimesolongas:
• Notreasonablypracticaltostreamseparately,and
• ValueoftheproductiswhollyormainlyattributabletooldIP,or
• If80%ormoreoftheitemsincorporatedintheproductrelatetooldIP
6
Confluence Tax LLP
…Thecompanyreceivesorpaysmilestones
Receivingmilestones
• Bumpyprofits
• Profitableyearsalternatewithlossmakingyears
• Lossesreducepatentboxdeductionfor:
• Othertrades
• Othergroupcompanies
• Futureyears
• Usuallyelectinforthefirstprofitableyear
• Separateanddistincttorulesfortradinglosses
• Milestonereceiptsshouldqualifyevenifassethasbeensold
Payingmilestones
• Whereacompanyhasincurredexpenditureinmakingaseriesof
paymentseachpaymentistreatedashavingbeenmadeonthedateof
thefirstpayment
7
Confluence Tax LLP
Patentboxcalculationwithlosses
Streamrelevantprofits
Allocatetaxableincome
Allocatetaxdeductible
expenditure
Deductroutinereturn
Deductmarketingasset
return
Multiplybynexusfraction
Adjustforlosses
Taxdeduction
RelevantIPincomestream
Year 1
Year 2
Year 3
100
1
100
(50)
(10)
(50)
(2)
(1)
(2)
(-)
(-)
(-)
48x1=48
-10 x1=-10
48x1=48
48
0
48– 10=38
24
0
19
8
Confluence Tax LLP
…IPisheldseparatelytoR&Dactivities
Investors
IPCo
IPCo
subcontracts
R&DtoR&DCo
R&DCo
IPCo
R&DCo
• Nexusfractionwillbe0
• Possibleactions:
TransferR&DactivitiestoIPCo
• Avoidsre-registrationcosts
• Stillhavehistoricalnon-qualifying
spend
• Businessimpact
TransferpatentstoR&Dco
• Re-registrationcosts
• Non-qualifyingacquisition
costs
Electearlytoapplyoldrules
• Ifavailable
9
Confluence Tax LLP
…Thereisasharesale
Vendor(s)
Purchaser
• Patentboxisnotrelevantforthe
vendor(s)
• Purchaseracquiresthecompanyand
itshistory
• Duediligencelikelytoincludepatent
boxquestions
Target
Target
• Hasanelectionbeenmade?
• Whatisthenexusfraction?
• Arethereadequaterecords?
10
Confluence Tax LLP
…Thereisanassetsale
Investors
• Vendorcanbenefitfrompatentbox
• Acquisitionspendwillreducethe
nexusfractionforthepurchaser
Vendor
Purchaser
• Isthisanissue?
- Foranearlystagedrugthe30%uplift
shouldpreventarestriction
• Whatifthepurchaserwantstosplit
theconsideration,e.g.
Asset
Asset
- 50%knowhow
- 50%patentrights
• Transferoftrade
• Purchaserinheritsnexusfromvendor
11
Confluence Tax LLP
…Myfactsareunusual
• Factsmightnotfallneatlywithinthelegislation
• Seekadvice
• Rulesarecomplicated
• Benefitcanbesignificant
• SupportavailablefromHMRC
12
Confluence Tax LLP
Q&A
13