Tax on patent profits to fall to 10% – but think tank fears plan will fail

The main rate of corporation tax is currently 28%. The Government will drop that to 10% on patent profits in a move which it says builds on existing research and development tax credits.

The Government said in its paper outlining its corporate tax reform proposals that it wanted to target tax cuts at areas of business that were most likely to move to other parts of the world in a bid to retain them in the UK. An influential think tank, though, has said that the measure will have little effect.

"The Government ... recognises that IP (intellectual property) is mobile and that multinational groups have a choice as to where to locate their IP ownership," said the paper on corporate tax reform (100-page / 1.9MB PDF). "IP ownership is distinct from the R&D, management, and manufacturing activity necessary to develop and exploit it, but there are clear commercial links and IP ownership is frequently co-located with high value jobs and economic activity."

"The Government recognises that some patent-rich UK businesses face a higher overall effective tax rate than their foreign competitors, who may benefit from special regimes available in other countries. While the Government does not feel that it is necessary to match these regimes, it does recognise that there is a need to improve the competitiveness of the UK corporate tax regime to complement the non-tax advantages of the UK as a leading location for R&D and IP," it said.

Patents on high-tech products and processes are identifiable and legally protected, and so can be easily traded or licensed between companies. Multinational groups therefore have a choice over where they locate work generating scientific and high-tech IP, and over where ownership of patents is located," it said.

It will introduce what it has called a 'patent box', which will be a preferential regime for patent profits.

"The Patent Box will aim to reward successful technical innovation," it said. "The Government believes that it is right to introduce this reform now in order to prevent movement of IP offshore and encourage the development of new patents by UK businesses, protecting and enhancing the status of the UK as a world leader in this field."

The Government said that it hoped that the move would help companies that are relying, more than ever, on income generated by intellectual property, such as patents.

"In recent years businesses have become more focused on building and deriving value from creating and exploiting intangible assets," it said. "These form an increasing proportion of the new and future assets of many multinational businesses, and for some businesses a large part of their value is based on their ability to exploit patents, brands and other intangible assets. Consequently the taxation of intellectual property, and its impact on attracting and encouraging further innovation in the UK, forms a key part of the Government‟s ambitions for the corporate tax system."

Patent attorneys' trade body the Chartered Institute of Patent Attorneys (CIPA) said that the move was necessary and welcome, even if it was not a new idea.

"We applaud the Chancellor’s decision to go ahead with the ‘patent box’ – an initiative that was first proposed under the previous government," said CIPA president Alasdair Poore. "The UK recently slipped out of the top five nations when it comes to patenting new technology."

"The cut in corporation tax to just 10 per cent on income from patents and intellectual property
will help reverse the UK’s recent decline in the international patenting league tables," said Poore.

CIPA said that though the cut was welcome it did not mean that the UK was the country putting the most resources into attracting and keeping IP-focused businesses.

"Our international competitors are ahead of us in providing encouragement to businesses – especially SMEs – to invest in developing and protecting new technology.  For example, the Chinese government pays a grant of $8,000 to companies that register international patents," he said.

Think tank the Institute for Fiscal Studies said that it was not clear, though, that the measure would have the effect that the Government hopes. It said that the move would result in a large cost to the exchequer for little benefit.

"Our analysis suggests that the policy will lead to a large reduction in UK tax receipts from the income derived from patents, is poorly targeted at promoting research, will add complexity to the tax system, and it is far from clear that any additional research resulting from the policy will take place in the UK," it said in a statement.

"A Patent Box is poorly targeted at research as the policy targets the income which results from patented technology, not the research itself," it said. "Once a patent is in place, a firm has a monopoly on the use of those ideas, and so can capture all of the returns and therefore faces the correct incentives to maximise the related income stream."

"In addition, to the extent that a Patent Box reduces the tax rate for activity that would have occurred in the absence of government intervention, the policy includes a large deadweight cost," said the Institute.