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Think Tank Rubbishes UK Patent Box Plans

Friday, February 5, 2010

Despite being welcomed by Britain's creative and research-intensive industries, a leading think thank has argued that the government's proposed 'patent box' regime will fail to encourage innovation.

In its 'Green Budget' assessment of the UK's public finances, released in February 4, the Institute of Fiscal Studies (IFS) said that the patent box regime "will do little to address market failures that discourage innovation."

The patent box... will be expensive and will predominantly benefit a few large companies," according to the IFS. "The money would better achieve the government’s stated objectives if spent maintaining spending on the science base and other infrastructure."

The government has yet to release details of how the scheme will operate, although Chancellor of the Exchequer Alistair Darling confirmed in his pre-budget speech to the House of Commons on December 9 that patent income will be subject to a 10% rate of corporate tax after legislation is passed. First, however, the government intends to consult with industry, and final legislative proposals are unlikely to emerge until the 2011 Finance Bill. The scheme will then operate from April 2013.

Commenting following Darling's announcement, Paul Smith, Head of International Tax at Grant Thornton said that the government will raise a lot more tax from the patent box regime than it does under the current corporate tax regime.

GlaxoSmithKline (GSK), one of the world's largest research-based pharmaceutical and healthcare companies, has also come out in praise of the proposals, suggesting that the patent box "is exactly the sort of active, long-term and creative support that we need from the government."

However, others are of the view that the UK patent box will struggle to compete with much more well-established and generous patent box regimes in the Netherlands and Belgium, and will therefore, in all likelihood, fail.

“The UK needs to have a tax system that hangs out the welcome sign for patents, rather than seeming to encourage the use of jurisdictions such as the Netherlands with their generous systems for such income," said John Whiting, Tax Policy Director at the Chartered Institute of Taxation.