Patent Box – Cost Sharing Arrangements | KPMG in the UK
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Patent Box – Cost Sharing Arrangements

Patent Box – Cost Sharing Arrangements

Patent Box implications for companies involved in collaborative research and development.


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Who should read this? 

This measure is of interest to those companies seeking to elect into the Patent Box regime under the new rules where they have a Cost Sharing Arrangement in place for R&D purposes.


Summary of proposal 

Further to the new Patent Box rules included in Finance Act 2016, these rules explain when and how companies which collaborate on R&D should apply the new R&D fraction to these ‘Cost Sharing Arrangements’ (CSAs).

The overarching aim is that companies that undertake R&D collaboratively through CSAs should not be penalised nor gain an advantage under the new Patent Box regime compared to companies that subcontract their R&D to connected and/or unconnected parties. 

The rules provide that:

  • Payments received for R&D under a CSA should be netted against any expenditure under the arrangement, so that only net expenditure incurred by the company goes into the R&D fraction;
  • Where the parties to the arrangement are unconnected, net expenditure is treated as subcontracted R&D to third parties and is ‘good’ expenditure for the R&D fraction.  Where the parties to the arrangement are connected, net expenditure is treated as subcontracted R&D to related parties and is ‘bad’ expenditure for the R&D fraction;
  • Where another party to a CSA, other than the Patent Box company, contracts out R&D, the expenditure will be treated as if the Patent Box company contracted out that R&D to the other party;
  • Where payments are made to join a CSA or for additional profits or rights under the CSA, a just and reasonable amount of the payment will be treated as an acquisition cost. Similarly, where income is received to permit another party to join a CSA or to give up some of the company’s rights, a just and reasonable amount will be treated as Relevant IP Income (RIPI); and
  • Where a company joins a CSA, or IP is introduced to a CSA, on or after 1 April 2017, the IP will be ‘new’ IP in the hands of that company.


Key changes from the draft legislation

The previous draft of the legislation widened the scope of arrangements that can qualify as CSAs with the removal of the requirement for contributions to be proportionate to the amount of profit received from the arrangement. However, this condition has been reinstated (with the intention that it can be met over the life of the CSA), as there was concern that its removal could significantly widen the scope for arrangements to be brought within the CSA provisions where this was not the legislative intention.

The final legislation has also clarified when an IP right is a new right for the company when held by another member of the CSA. Broadly, this is when the company or the IP holder became a party to the arrangement on or after 1 April 2017 or when the right was applied for after 1 July 2016 by the other company. This is in line with the previous draft legislation. However, this could have led to a situation where a company which previously accessed the IP through an exclusive licence, but which now formed a CSA, was treated as acquiring new IP when the substance of the IP in their hands had not changed. Clauses have been inserted to clarify that such IP would remain as ‘old’ if this was its previous status for the company.

Treatment of balancing payment: the draft legislation set out that where a company is a member of a CSA, another member contracts out R&D to someone else (A) and the company makes a payment for such contracting, the payment will be treated as if made to A. However, this potentially created a ‘mismatch’ as the categorisation of any income received in similar circumstances was based on the relationship between the company and the other CSA member (not to mention the potential practical difficulties in determining to whom other CSA members have contracted out). The final legislation resolves this by treating balancing payments in respect of R&D contracted out by another party to the CSA as if the company had contracted out to that other CSA member.

Finally, the draft legislation intended that for accounting periods straddling the commencement date of 1 April 2017, two notional accounting periods would be required.  However, this has been removed in the final legislation such that the rules apply for accounting periods beginning on or after 1 April 2017 only.



The rules are effective for accounting periods commencing on or after 1 April 2017.


Our view 

Publication of the final cost sharing rules will be welcomed by those that have been waiting for certainty on how the new Patent Box rules will apply to their CSAs.  

With regard to the changes made from the draft legislation, whilst the reincorporation of the requirement for companies to be contributing to and benefiting from CSAs in equal proportions may make it harder for some genuine CSAs to demonstrate that they can benefit from the provisions, this should avoid other arrangements inadvertently falling within the remit of what are still complex rules.

However, the other changes from the draft legislation have addressed several of the concerns that had been raised and have gone some way to limiting this complexity, as well as the practical issues with implementing the rules.  This can only be a positive step.


For further information. please contact:

Carol Johnson

T: +44 (0) 20 7311 5629


Peter Chapman

T: +44 (0) 121 335 2782


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