Patent Box legislation aims to boost UK's R&D industry

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Written by Nick Beckett The life sciences industry is the third largest contributor to economic growth in the UK, with an annual turnover of £50...

Written by Nick Beckett

The life sciences industry is the third largest contributor to economic growth in the UK, with an annual turnover of £50 billion. With concerns for the economy still top of the political agenda, the government is now keener than ever to woo the industry to the UK and attract inward investment.

In his autumn statement last year, Chancellor George Osborne announced a number of measures to support the UK life sciences industry including a £180 million catalyst fund to support biomedical start-ups, a consultation on opening up the NHS to life science companies and a shake-up of the R&D tax credits system.Now, the government is finalising the details of its latest incentive, the ‘Patent Box’, a preferential tax regimethat it hopes will re-establish the UK’s position as a world leader in patented innovation.

When it comes into force in April 2013, Patent Box will reduce UK Corporation Tax on patent profits to 10 percent, giving a welcome boost to research and development and providing incentives for companies to retain intellectual property in the UK.

These incentives are sorely needed.Other European countries, like Ireland, Switzerland and Hungary, have had similar systems in place for years, giving them a competitive edge over the UK.If patent-rich pharmaceutical and healthcare businesses face higher tax rates in the UK than abroad, then there is a risk that they will emigrate overseas – at a huge loss to the British economy. Whilst the existing system of R&D Tax Credits has given some relief for spending on R&D, there has been no similar incentive for businesses to retain intellectual property in the UK once it has been created.

Healthcare and pharmaceutical companies will also reap benefits from the new regime. A combination of economic uncertainty and the fast approaching patent cliff – the expiration of patents on blockbuster drugs and consequent impact on revenues – has sent investment into research and development into decline. Tax incentives like Patent Box will provide these companies with much needed support and breathe life into dwindling R&D activity.

The draft legislation has certainly received a warm welcome from the industry. The Association of the British Pharmaceutical Industry (ABPI) was quick to endorse the proposals, while GlaxoSmithKline plans to invest more than £500 million in manufacturing projects and £50 million in a UK capital venture fund as soon as Patent Box is in place.

By incentivising research and successful innovation, Patent Box is certainly a step in the right direction. For some, however, the new legislation does not go far enough. As it stands, Patent Box will only apply to patents granted in the UK and some other European countries, and not to those granted to UK healthcare and pharma companies in other major R&D centres like the US and Japan. What’s more, phased in over time, the full effect of the relief will not be felt until 2017.

There are also some anomalies. Patent Box is designed as a ‘one size fits all’ model which will not be ideal for all sectors. This is particularly true for medical devices which on occasion contain thousands of patented inventions developed by several different companies. Ironically, the number of patents embedded in a product is not directly taken into account in calculating Patent Box tax relief.

The introduction of Patent Box may also have an impact on regulatory issues beyond UK borders. In 2009 the European Commission suggested that strategies for secondary patents – such as those covering new products or processes that use existing ingredients already under patent – were often aimed at preventing generic companies entering the market rather than actually protecting a new innovative product. Now these strategies may also be driven by tax incentives: the Commission may be concerned that pharmaceutical companies may divert much needed R&D investment towards quick-win secondary patents to boost their Patent Box relief. The competition authorities may consider stepping in to examine any excessive use of weak secondary patents for such tax benefits.

To take full advantage of the proposals, healthcare and pharmaceutical companies will need to consider Patent Box tactically alongside other R&D incentives to determine the best place to hold their patents. More sophisticated tax structures may be in order, but with the introduction of Patent Box little over a year away, companies will have to act fast.

About the author:

Nick Beckett is a partner at leading law firm, CMS Cameron McKenna, where he heads the Intellectual Property practice and Lifesciences industry groups. He represents high-profile companies in the Lifesciences sector and also coordinates pan-European patent enforcement and other intellectual property advice for a number of clients. He advised Takeda on its €9.6 billion acquisition of Swiss drug company, Nycomed, in one of the largest multi-jurisdictional pharma M&A transactions of 2011and advised Eli Lilly in the leading pharmaceutical parallel trade repackaging case before the European Court of Justice. Nick is also on the Research and Innovation Committee of the Association of British Healthcare Industries (ABHI).

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