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Gauke defends patent box

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In a speech to the Securities Industry Conference on 3 October, financial secretary to the Treasury David Gauke MP rejected criticism in international circles that the UK’s patent box facilitates profit shifting. It ‘simply would not be worth the hassle’ for companies to use the patent box for the sole or main aim of shifting profits to receive a lower tax rate, he said.

‘The patent box was introduced to encourage innovation and to bring high value science and technology jobs and investments to the UK,’ Gauke said. ‘It also ensures that the jobs that are already here will stay here.

‘This policy has been widely welcomed by businesses, and the evidence of growth is already clear. GlaxoSmithKline has attributed to the patent box its additional investment of £500m in manufacturing in the UK, along with the creation of 1,000 new jobs and the construction of a new factory. They have gone as far as to say that the patent box has “transformed the way [they] see the UK as a place to invest”.

‘Engineering, life sciences, manufacturing, technology, and defence are all sectors who will see a positive effect from the patent box. The UK economy will see a positive effect as a result of that.

‘I reject any suggestion that the UK’s patent box facilitates profit shifting. Let me be clear here: categorically, it does not create an opportunity for businesses to reduce their taxes without increasing their value to the UK economy. To gain the advantages of the patent box, a company must either have developed the IP itself, or actively manage the commercial exploitation of the IP. This is a substantial amount of activity for a business to undertake.’

The speech also reiterated the UK's preference for determining 'substantial activity' in a particular jurisdiction through transfer-pricing principles, rather than the 'nexus approach' favoured by many other countries, which connects tax benefits directly to R&D expenditures.