The European Commission (EC) is probing Britain’s flagship tax break for intellectual property, amid fears it could be an illegal state subsidy.
The EC is said to be carrying out an ever-expanding investigation into whether tax breaks to multinationals violated rules governing state support for companies.
The commission has reportedly asked the UK Treasury to give a more detailed explanation of the “patent box”, which is a tax break worth almost £1 billion a year for profits from patented products and processes. It has also asked the Treasury to show that the patent box did indeed entice genuine research investment.
If the commission does find evidence of illegal state support, it has the power to require that all lost revenues are recouped, the Financial Times reported. However, a formal investigation has not yet been launched and the publication added that enforcing state aid restrictions linked to tax policy is extremely difficult.
According to 2012 Budget documents, the patent box is predicted to cost the UK Treasury £350 million in 2013-14, which is its first year of operation. That figure is expected to increase to over £900 million by 2016-17.
Last week, a defence of the patent box was issued by the UK Treasury. It said that “most” of the activities that qualified for the patent box would meet a “substance test”, which represents one of the main criteria for fair tax competition.