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UK 'Patent Box' Announcement Welcomed

by Robin Pilgrim,, London

11 December 2009

The announcement that the UK will introduce a "patent box" regime that will impose a lower rate of corporate tax on patent income has been welcomed as a timely boost to Britain's creative industries, although some have questioned why the government has decided to delay its introduction for more than two years.

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.

Darling said in his speech that the UK "has a remarkable record of ideas and innovation. We’ve won more Nobel prizes than any country of our size. We need to do more to support this ingenuity and ensure this creativity is harnessed in this country. I want to encourage research and development in the pharmaceuticals and biotech industries. So, following consultation with business, I will introduce a 10% corporation tax rate on income which stems from patents in the UK."

The announcement was welcomed by business and financial advisor Grant Thornton as a "step towards making the UK a great place from which to operate as a multinational business" that could help stem the recent exodus of firms with intellectual property rights from the UK, although the firm questions why Darling is not introducing the scheme sooner.

"The Treasury will raise much more tax by introducing the 10% rate on IP income than it would by maintaining the current tax system and encouraging groups to locate their IP abroad. It is just such a shame that the new rules will not come into force until 2013. Businesses need all the help that they can get and any delay is not helpful," commented Paul Smith, Head of International Tax at Grant Thornton.

Moreover, when the UK patent box is introduced it will be competing with similar provisions that have been in place in the Benelux countries for a number of years where the tax rate is closer to 5% and the scope is wider to include other intellectual property as well as patent rights.

John Whiting, Tax Policy Director at the Chartered Institute of Taxation, said that the proposal was a "modest but welcome step in the right direction" and suggested that the Chancellor should have gone much further given the generous schemes in other jurisdictions.

“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," he argued.

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