UK patent box proposals

The Brits are going Dutch - well, at least in the field of corporate tax they are. In 2007 the Dutch government introduced a “patent box” scheme which was intended to encourage greater research and development investment in the Netherlands by giving Dutch companies favourable tax treatment on income derived from patents. A few other European countries have also implemented similar schemes.

In December 2009, the British Chancellor Alistair Darling announced that the UK Government intended to introduce its own “patent box” scheme from April 2013. The Chancellor has recently reconfirmed the UK Government’s commitment to a UK “patent box” in the April 2010 Budget.

The “patent box” scheme proposed by the UK Government will see the rate of corporation tax for UK companies in respect of income which derives from UK patents cut from 28% to just 10%.

The introduction of a UK “patent box” has been warmly welcomed by many British companies most notably by pharmaceutical company GlaxoSmithKline (“GSK”) which has been lobbying the UK Government for some time to introduce such a scheme. Andrew Witty, CEO of GSK commented that, "The patent box is exactly the sort of active, long-term and creative support that we need from the Government to ensure that the UK remains an attractive place for highly skilled sectors such as pharmaceuticals. For GSK, assuming the new regime will apply to patents currently under development it will have the immediate impact of making the UK a priority for future investments, particularly in manufacturing".

In response to the UK Government’s announcement, GSK announced that it will be investing an additional £500 million into UK manufacturing and in the creation of new jobs in the UK. Although media attention has fallen largely upon GSK, the scheme is intended to benefit businesses of all sizes and in all sectors of the economy. Accordingly, innovative companies in other sectors are also likely to be paying close attention to the UK Government’s proposals.

Companies located outside of the UK may also want to consider transferring at least their UK patent portfolio to an IP holding company located in the UK or to a UK subsidiary. Some companies may also wish to review their UK patent filing and prosecution strategy to ensure that key UK patents do not grant until after the new tax regime takes effect.

The new tax regime will be an encouragement to many UK companies emerging from recession in that more of the financial benefit derived from UK Research and Development efforts and the subsequent securing of patent protection will be retained by UK companies. The scheme is also likely to encourage SMEs to invest more in protecting their inventions through making greater use of the UK patent system. Smaller businesses who act as suppliers to companies which specialise in R&D are also likely to benefit indirectly - GSK alone has a network of over 20,000 UK suppliers.

Precise details of the UK’s “patent box” scheme have yet to be finalised but there will be a period of consultation with business over the summer of 2010 with a view to publishing a consultation document soon thereafter. A number of important issues will need to be addressed including how income derived from UK patents is to be identified and evaluated. For example, value might be derived from patents by licensing, by the sale of patented products or components, or by reducing production costs through the use of patented technologies.

It is also unclear whether the new tax regime will apply to non-UK patents held by UK com-panies and whether there will be any form of relief for UK companies who acquire patents from third parties. There can also be considerable variations in the time taken from inno-vation to the grant of patents and in the time taken to commercialisation in different sec-tors. Some areas of technology can develop very rapidly so that significant income from a technology may be generated before many patent applications covering that area of tech-nology have actually granted. The UK Government will no doubt want to ensure that the new tax regime is favourable equally to all sectors of the economy, not just the pharma-ceutical sector.

The proposals announced by the UK Government extend, at present, only to patents and do not cover other forms of intellectual property. This may be frustrating to some SMEs, such as UK software developers, who are likely to rely upon other forms of intellectual property protection. However, it is likely that there will be lobbying for the tax regime to be broadened up to include other forms of intellectual property protection.

In summary, the UK Government’s proposal for a UK “patent box” coupled with the UK’s favourable system of tax relief for R&D expenditure will continue to encourage innovative companies to invest and manufacture in the UK.

Phil Jeffrey, Partner
First published in Intellectual Property Magazine, June 2010