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The United Kingdom’s ‘Patent Box’ – a scheme allowing for generous tax breaks on patent-related profits – could be hamstrung by European authorities amid concerns that it would lead to unfair tax competition among EU member states. The programme’s supposed economic benefits – such as increasing patenting activity among SMEs and encouraging multinationals to base their R&D activities in Britain – have also been called into question.
Echoing German criticism of patent box programmes earlier this year, the European Commission has claimed that the UK scheme breaches the EU code of conduct for business taxation. This is intended to prevent EU member states from operating policies that result in harmful tax competition. The EU Code of Conduct Group is due to meet tomorrow (Tuesday) to discuss the Patent Box and if it agrees with the Commission, the UK government could be pressured into changing the scheme to bring it into line with the code.
As previously reported by IAM, the Patent Box was introduced in April this year with the aim of incentivising companies into locating their R&D activities in the United Kingdom. Under the terms of the scheme, companies can apply a lower 10% rate of corporation tax to worldwide profits arising from patents rather than the current main rate of 23%. As explained by Blick Rothenburg partner Paul Smith, the scheme has far wider scope than similar tax breaks offered in other EU member states. “This is because the UK rules apply not only to royalties and licence fees from the licensing of such rights but also to, for example, the sale of goods incorporating items that have been patented, and to sales of goods produced using machinery that incorporates patented parts,” he told IAM back in March. As a result, the reduced tax rate will be available on profits derived from the sale of a whole product incorporating a patented technology, rather than just the patented component alone.
In addition, it was also hoped that the box would encourage UK businesses – which lag behind counterparts in comparable countries when it comes to patenting – to be more proactive in filing. Earlier this month, Cambridge Design Partnership and Marks & Clerk released the findings of a joint study into its projected impact. Among other things, the report suggests that the Patent Box should lead to an increase in patent applications. This is based on findings that in countries such as Belgium, Luxembourg and the Netherlands – which had introduced similar patent-related tax breaks in 2007 and 2008 – filings increased over the following three years. During the same period, patent applications in the United Kingdom, the United States and Japan decreased, suggesting that tax breaks encouraged inventors to continue to seek patent protection even amid the cost constraints created by the global financial crisis.
However, the UK’s Institute of Fiscal Studies (IFS) has suggested that the main beneficiaries of the Patent Box will be large corporations with extensive bases outside of the UK that already file a high volume of patent applications. GlaxoSmithKline, for one, has sought to take advantage of the scheme by moving 150 R&D projects to the UK. The box is expected to drop the company’s effective tax rate by 3% by 2017 according to calculations from Citigroup.
On the other hand, SMEs with few or no patents and start-ups that have yet to turn a profit will have little to gain, according to the IFS. And in its recent opinion, the Commission questioned whether the scheme would actually result in a significant increase in R&D investment in Britain, stating that it is not linked to “real economic activity” and is “poorly targeted at incentivising research...because the policy targets the income from a successful idea and not the underlying research activities”.
Now, the UK government faces the very real prospect that it may be forced into weakening the scheme or dismantling it altogether. That would be quite a setback for an administration that has sought to enhance the country’s innovation credentials. But patents are just one factor when it comes to innovation. As analysis of China’s patent policy shows, offering generous tax breaks may incentivise businesses to file for more patents; but if that does happen, all it would demonstrate for certain is a rise in patenting, not an increase in innovative activity.
IP management, IP politics, Patents, IP business, IP finance