'Thinking Inside The Box' To Encourage Innovation

By introducing a Patent Box scheme that offers reduced taxes to innovative companies, the UK government hopes to encourage investment in the country. For IP-rich pharmaceutical companies with UK operations, the incentive is a golden opportunity to reduce tax burdens.
Sep 01, 2011

Pharmaceutical companies with operations in the UK stand to benefit from the British government's plan to encourage innovation by 'thinking inside the box'.


(STHEPHEN WEBSTER/GETTY IMAGES)
The box in question is the Patent Box — a planned preferential tax regime that will reward innovative, intellectual property (IP) rich companies for the active patents they hold. Under the scheme, corporation tax on profits arising from products or services protected by patents will be slashed from the current 26% to just 10%. The Patent Box scheme (1) is currently at advanced stages of consultation, with draft legislation expected to be published in autumn 2011 and the scheme scheduled to go live from 1 April 2013.

Encouraging innovation and R&D

The scheme is part of the government's efforts to enhance the competitiveness of the UK tax system and to re-establish the UK as a location of choice for innovative, high-tech companies. One of the major supporters of the scheme is GSK, which has cited a number of its own important developments in the UK that the Patent Box would help facilitate, including:
  • Securing new investment in the manufacture of GSK's next-generation respiratory inhalation device and further investment in its continuous tablet manufacturing technology.
  • Ensuring that the UK is the location for GSK's next biopharmaceutical manufacturing plant; and development of a planned manufacturing centre of excellence to support its global dermatology franchise.
  • Making a significant contribution to the construction of a new facility at the University of Nottingham focused on the development of 'green chemistry' technology.
  • Launching a new €56.8-million UK Venture Capital Fund.

According to GSK, these new investments would create an estimated 1000 new jobs in the UK over the lifetime of the projects. The investments would also benefit the wider construction industry and the more than 10000 companies that supply GSK with services and facilities in the UK.

Boxing clever

To claim the Patent Box tax deduction, a business must actively hold a qualifying patent and receive income related to that patent. Income derived may be embedded in patented products; for example, it may come from patent licensing and royalties or from patent sales. It could also be income from damages paid by third parties for infringing a qualifying patent. The benefits of the Patent Box will be accessible both through legal ownership, including acquired patents, and through holding an exclusive licence to exploit a patent commercially. In addition, the scheme will apply equally to patents developed under partnership or joint venture.

The government proposes that the Patent Box should include patents granted by the UK's Intellectual Property Office (UKIPO) and the European Patent Office (EPO). Furthermore, it will include worldwide income earned by UK-based businesses from inventions covered by a qualifying patent, not just income that falls within the territorial limitations of the particular patent. Currently, the plan is for all active UKIPO/EPO patents to be eligible, including those that have been subject to supplementary protection certificates. However, the UK Treasury has said that it won't extend the 10% corporation tax rate to other forms of IP, such as copyright and trademarks, although businesses holding such IP rights will benefit from lower overall rates of taxation.

The scheme will be phased in over five years, starting at 60% of the potential benefit and rising to 100% in the fifth year.