The Patent Box: Report Card
It’s been a little over a year and a half since the UK Government introduced the Patent Box corporation tax reduction regime and it seems timely to take a look at how the scheme is operating.
What Is It?
The scheme allows payers of UK corporation tax to reduce the tax paid on qualifying profits to 10%. Qualifying profits are those obtained from patented inventions, provided certain criteria are met. It was introduced in the 2013/14 tax year and is being steadily phased in until the full benefit is available from 2017. In the current 2014/2015 tax year, 70% of the benefit is available.
Why Was It Introduced?
Put simply, to further encourage UK innovation, in addition to other such benefits including R&D tax credits. The Patent Box idea wasn’t a wholly British invention, if you’ll excuse the pun, and similar schemes have been in operation in various EU countries prior to its UK implementation.
Has It Worked?
It’s not been without its share of controversy. Both Germany and the OECD have raised concerns that this is potentially a form of unlawful state aid, although those concerns are apparently waning and it seems likely to be deemed lawful, and it appeared to be a big factor in the attempted Pfizer takeover of AstraZeneca, who seemed to be more interested in the tax benefits than the invention stimulus. Big pharma lives or dies on its patent portfolios after all.
Having said that, GSK have indicated that recent £700 million investments in its UK manufacturing facilities are largely attributable to the Patent Box tax relief.
The UK Government in the 2012 budget estimated the steady state cost after initial phasing in period i.e. from 2017 onwards to be £1.1 billion in foregone tax revenues, it will be interesting to see how much of that is being foregone should the Chancellor of the Exchequer itemise the figure in the Autumn Statement.
But perhaps that isn’t the best indication of its success; perhaps we’d be best looking at the patent filings. The UK-Intellectual Property Office’s figures suggest that there has been a general decline in patent applications by UK applicants over the last ten years; from around 19,000 per annum in 2004 to around 15,000 in 2013.
Patent applications remained reasonably steady, and even increased slightly from 2010-2012, the point in time where the Patent Box was being discussed, publicised and legislated, but prior to it being enacted.
However, there was another slight decline in 2013 filings.
These figures of course coincide with the recent (and severe) recession, which one would expect to have an impact on filing activity anyway, so perhaps it’s dangerous to draw conclusions that the Patent Box is not having an effect, and it will be interesting to see the 2014 figures once they are published. These figures only consider UK-IPO filings, whereas patents granted by other patent offices may be used in Patent Box savings.
Overall, the Patent Box still represents a great opportunity for innovative businesses to make significant savings on corporation tax and should not be ignored. To take advantage of it, you are going to need a patent or patents to do so.
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