Bolstering UK Pharma with a Patent Box

Nick Beckett from the UK law firm CMS Cameron McKenna explains how the UK government's proposed Patent Box legislation may impact the pharmaceutical sector.
Jun 01, 2012
Volume 24, Issue 6

What is at stake in the proposed Patent Box legislation that has been unveiled in the UK?

Nick Beckett
Currently, companies in the UK must pay a corporate tax of 25% on taxable profits. The UK's new Patent Box legislation, however, will reduce the tax on patent profits to 10%. Although the government is still consulting on the finer details of the legislation, this change will give companies the chance to evaluate how best to apply the new tax rate to all profits attributable to qualifying patents, whether these are paid separately as royalties or embedded in the price of products.

The new tax regime will take effect in April 2013 and aims to encourage innovation across all high-growth industries in the UK, including the pharmaceutical industry, that rely heavily on cutting-edge research and development. It should provide an incentive for companies to retain and commercialise existing UK patents by making the UK more competitive with foreign regimes that already offer similar tax reliefs.

Unlike other tax regimes elsewhere in Europe, such as in Ireland, Switzerland and Luxembourg, the UK system will not apply to copyright or brands because the UK government does not consider these forms of intellectual property (IP) to be strongly linked to the high-growth, R&D heavy activities that it wishes to encourage. Companies will need to analyse the pros and cons of all of the available tax relief schemes in Europe to identify the best geographical location for their patents to be held.

It is not only UK companies that can benefit from the Patent Box—the legislation applies to patents granted not only by the UK's Intellectual Property Office, but also by the European Patent Office and some other EU national patent offices that have similar patentability criteria to the UK. Again, the government hopes that more international pharmaceutical companies will commercialise their patents in the UK to take advantage of the tax relief.

Why does the UK need a Patent Box?

The new legislation will encourage UK competition with other European countries, some of which have had similar tax-reduction systems in place for years. Previously, patent-rich UK businesses faced a higher overall effective tax rate compared with similar companies abroad, resulting in the emigration of intellectual property and its exploitation overseas rather than in the UK. Luxembourg, for instance, has had a Patent Box in place since 2008 that exempts 80% of royalties, damages and capital gains realised on certain intellectual property rights, creating an effective tax rate of around 5%, while Belgium offers a maximum effective tax rate of 6.8%.

Whilst the UK's existing system of R&D tax credits, which offers a tax deduction based on R&D spending in the UK, has provided relief for certain expenditure, there is no similar incentive for businesses to retain intellectual property in the UK once it has been created. At a time when low R&D productivity is a major challenge for the entire global pharmaceutical industry, the UK government hopes that the Patent Box will reestablish the country as a leader in patented technologies.

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