Opening the Patent Box

Jun 01, 2013

Julian Upton
April 1 saw the activation of the United Kingdom's much vaunted "Patent Box," which introduces a lower rate of corporation tax on profits generated from UK-owned intellectual property. Under the scheme, businesses will pay just 10 percent tax (as opposed to 23 percent) on any profits arising from patents newly commercialized in the UK.

Inspired by similar schemes implemented in Belgium and the Netherlands in 2007, the UK's then-Labour government proposed the Patent Box in 2009 as a measure to strengthen the country's "knowledge economy." The scheme's tax breaks will extend to royalty and milestone payments, and it ushers in a simplification of the existing R&D tax credits system, which allows companies to write off research costs against their tax bills.

The belief that the pharma sector will be the principal beneficiary of the Patent Box was boosted when GSK announced a new, £500m ($760 million) investment just hours after the scheme was confirmed in the Chancellor of the Exchequer's March 2012 budget. The GSK's site-in-progress (in Ulverston, Cumbria) will be the company's first new facility in the UK in 40 years. On announcing it, GSK head Andrew Witty welcomed the Patent Box as "exactly the sort of active, long-term, and creative support that we need from the government" to make the UK "a priority for future investments, particularly in manufacturing."

Law firm Latham & Watkins predicts that the Patent Box scheme is likely to be successful in deterring pharma and biotech companies from migrating IP out of the UK. And the nearly-£1 billion ($1.5 billion) revenue loss that its introduction will cost the government, the firm says, represents "a significant windfall" for the pharma sector.