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Mixed Response To UK Innovation Proposals

by Robert Lee,, London

16 June 2011

The UK's newly launched consultations on Patent Box proposals and amendments to the Research and Development tax credits regime have met mostly with praise, and are being seen as a boost to the UK's attractiveness and competitiveness.

The separate consultations were launched last week. The so-called Patent Box would see the introduction of a preferential system for profits arising from patents. Companies would be permitted to apply a 10% corporation tax rate to profits attributed to patents from April, 2013. The R&D tax credits consultation is designed to further simplify the scheme. This is to be achieved through an extension of the credit, meaning that the costs of more contract workers will qualify. This consultation is the second carried out by the government in this field, and the document contains its response to previous discussions.

With regard to the R&D consultation, PwC welcomed the move, stating that it confirms the desire for change, allowing the credit to be accounted for "above the line" within operating costs, rather than as a tax benefit within the tax charge, and thus reducing the cost of doing R&D. Deloitte also concurred in seeing the benefits of an "above the line approach", saying the changes positively support innovative companies. Carmen Aquerreta, tax partner in the R&D and Patent Box team at Deloitte argued that: "A move to an ‘above the line’ regime might assist loss making large companies who do not currently get any immediate benefit from the scheme".

However, there has been some criticism of what was deemed lacking in the consultation. Diarmuid MacDougall, PwC R&D network leader said: “I’m delighted the wishes of businesses have been listened to. However, SMEs who do R&D as sub-contractors currently lose the more valuable SME relief and there had been some hope this would be changed but there is nothing in the document to suggest this. A credit that reduces the cost of doing R&D rather than tax will have a much greater impact on decisions about whether to locate more R&D in the UK. This is important for jobs, skills and our future economic prosperity.”

In addition, Aquerreta pointed out the potential difficulties of some of the measures. "The proposals to expand the qualifying expenditure recognised under the large company scheme to include subcontracted work which is part of a wider R&D project will clearly be beneficial to companies in some sectors, such as pharmaceuticals. In practice, for many other industries, determining which activities could be included will be more difficult."

On the subject of the Patent Box consultation, there was also praise. Aquerreta argued that "encouraging innovation in the UK is a worthwhile objective and a patent box regime is a sensible incentive to do that". The proposal to include income earned in the UK from worldwide product sales, provided that the product includes an invention covered by a UK or European Patent Office patent is seen as positive, as is the news that income from the sale of a patent will fall within the scheme.

Nonetheless, as with the R&D consultation, concerns are evident. Aquerreta noted that: "We support the idea of applying a formula provided it contributes to make the regime simple, but don’t think the proposed formula is quite right. It relies too heavily on whether or not a company does R&D. We don’t think that innovative behaviour is limited to R&D activities, although it’s helpful to see that that regime could also apply to companies that bundle other people’s inventions into new products".

In a more general commentary, the CBI's Head of Tax and Fiscal Policy, Richard Woolhouse focused on the incentives offered by both plans. “Both moves will enhance the UK’s attractiveness as a location for innovation and R&D, by attracting new investment activity and acting to keep existing patent income within the UK. An effective patent box could boost high-value manufacturing jobs, and the proposed tax credit changes should encourage businesses to invest in R&D at all points in the business cycle. These proposals should kick-start a wider discussion on how to reward the creation and exploitation of all types of intellectual property.”

The two consultations remain open until September 2.

TAGS: tax | business | patents | intellectual property | corporation tax | United Kingdom | tax credits | manufacturing | contractors

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