THE PATENT BOX breaches the code of conduct for business taxation, according to the European Commission.
According to the EC, the Patent Box, which provides R&D tax reliefs to UK companies, breaches a code of conduct that aims to prevent countries from operating policies that result in harmful tax competition.
The policy has proved popular since coming into effect in April, with major pharmaceuticals business GlaxoSmithKline set to relocate 150 oveseas research projects to the UK in order to take advantage of the scheme.
The commission has raised concerns in the past that the policy is "poorly targeted at incentivising research...because the policy targets the income from a successful idea and not the underlying research activities".
It adds much of the benefit will accrue to large, profitable firms that earn the majority of income from patents.
Chief among its concerns over the Patent Box is that it may grant tax advantages without requiring any real economic activity in the UK if, for example, where a firm owns the intellectual property in the UK but conducts research and commercialisation in other countries.
Moreover, the commission said, the rules for determining eligible profits are deemed to depart from internationally accepted principles. In contrast to other countries, the UK Patent Box does not require profits to be associated with individual patents.
The commission's assessment will be discussed by member states at a meeting of the Code of Conduct Group on 22 October. The UK government is likely to argue the policy does not breach the provisions. If the commission upholds the claim, the UK government will come under pressure to amend the policy.
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