While sold to the UK as a means to incentivise innovation within the UK, the Patent Box scheme has been perceived by many as one of a number of tax incentives to try to tempt companies, and in this case large technology companies, to run their taxes through the UK. The most recent official statistics show an increase in the amount of relief claimed, which should be good news for business, innovation and the UK economy. However, the figures also suggest that more can be done by small-medium companies to ensure they are making the most of the incentives. In addition, more research will be needed to determine the extent to which the Patent Box is achieving its original aim of incentivising innovation in the UK.
What is Patent Box?
Since 2013 the UK Government has offered a tax incentive for companies profiting from patented inventions. Patents granted by the European Patent Office (EPO), the UK Intellectual Property Office (IPO) and by the national patent offices of several other European Economic Area (EEA) states are eligible for inclusion in the scheme. The scheme, known as the Patent Box, allows a reduced corporation tax rate of 10% to be applied to such profits.
What does the most recent data relate to?
It is first useful clarify the figures and time frames the data relates to. Put simply, the statistics available to date relate only to the old Patent Box regime; only patent applications with a filing or earliest priority date before 1 July 2016 are eligible for inclusion in the old Patent Box regime, until 31 June 2021 when the old regime will be replaced. The Patent Box scheme was re-vamped in 2016 to comply with a new international framework for preferential tax regimes set out by the Organisation for Economic Cooperation and Development (OECD). The aim of the new scheme is to require companies to perform sufficient relevant R&D in the UK to benefit from a favourable tax rate, so that the scheme cannot be used for profit shifting. The new scheme won’t allow for companies to simply run their finances through the UK to obtain their reduced tax, but in return they have to invest in R&D in the UK. All in all it sounds like a fairer system and one that could result in the original stated aims of patent box. However, from a UK economic perspective, time will only tell which system has a more positive economic impact.
The next set of statistics, for fiscal year 2015-2016, should also reflect only the old Patent Box regime. Future statistics for the 2016-2017 fiscal year however should begin to reflect the transition to the new Patent Box regime. It will be interesting to observe whether the growth of the Patent Box is sustained over coming years.
A total of £651.9 million in tax relief was claimed for the 2014-2015 fiscal year by 1,135 companies, according to official statistics released on 14 September 2017. This represents a near doubling of the total tax relief of £365.5 million claimed by 828 companies in the 2013-2014 fiscal year.
A proportion of this increase is likely to be related to the “phase in” of the Patent Box scheme. Only 60% of the full benefit of the Patent Box was available in the 2013-2014 fiscal year. 70% of the full benefit was available for the 2014-2015 fiscal year.
The spread of tax relief among different sized companies
The majority of the tax relief (£616.6 million, or 94.6% of the total) was claimed by “Large” companies, defined according to the EU Enterprise Size Classification (companies with a turnover above €50 million and either total assets above €43 million or over 250 employees). These “Large” companies represented just over a quarter of the companies enrolled in the Patent Box (305 of 1,135).
Despite a large number (815) of small, medium and micro sized companies (again defined using the EU Enterprise Size Classification) claiming Patent Box relief in 2014-2015, such companies received only 5.5% of the total tax relief under the Patent Box.
Nevertheless, an increase in tax relief under the Patent Box has been experienced by companies of all sizes. The share of the tax relief taken by large, small, medium and micro sized companies has remained remarkably consistent (from 95.4%, 3.4%, 0.9% and 0.3%, respectively to 94.6%, 4.1%, 1.0% and 0.4%), despite the near doubling of the total value of the Patent Box from 2013-2014 to 2014-2015.
Investment by GSK: A return on the Government’s investment?
One large company presumably reflected in the statistics is the pharmaceuticals giant GSK. A number of GSK press releases since 2012 have explicitly mentioned the Patent Box as a reason the company has relocated some of its offshore R&D operations back to, and invested further in, the UK. These include:
A £500 million investment, creating up to 1,000 new jobs announced on 22 March 2012
A £200 million investment, relating to the establishment of a centre for pharmaceutical manufacturing innovation announced on 11 December 2013
A £275 million investment in GSK’s UK manufacturing network announced on 27 July 2016
It is not possible to know how much of this investment would have taken place even without the Patent Box. Moreover, there are hopefully other reasons beyond the existence of the Patent Box which could occasion investment in the UK. However, these figures clearly represent significant sums in the context of the cost to the UK Government of delivering the Patent Box. The total cost of the Patent Box in tax relief claimed in the first two fiscal years in which is operated (2013-2015) was around £1,000 million. As indicated by the press releases mentioned above, GSK alone announced around £700 million of investment in the UK before and during this period which was said to be encouraged by the Patent Box.
There are other indications that the tax benefits on offer from the Patent Box are stimulating innovation and pushing economic growth. In particular, research conducted by Thomson Reuters showed that the number of UK-published patent applications increased by more than 10% from 2013 to 2014.
Accessibility challenges of Patent Box
Qualitative research on the Patent Box was included by the IPO in the publication entitled “Building the Evidence Base on the Performance of the UK Patent System” (see our separate article here). The research was conducted prior to publication of the 2014-2015 fiscal year Patent Box statistics. The report describes a consensus among large companies and attorneys that despite the benefits of the Patent Box, it may be difficult for small companies to capitalise on the opportunity if they do not have their own accounts department or specialist knowledge of R&D and IP. The most recent data confirm that large companies continue to be the primary beneficiaries of the Patent Box.
Looking ahead – what to do now to make use of Patent Box
The changes to the new Patent Box scheme are unlikely to improve the accessibility of the scheme to smaller companies. This is because considering relevant R&D may require additional record keeping and accounting expertise. We therefore suggest that companies interested in the Patent Box seek professional advice at an early stage; joined up thinking between patent attorneys and accountants may help maximise the potential benefits of the scheme.
The bigger picture – what do these results tell us about the success of Patent Box?
It may be that the large sums claimed by large corporations is giving the Patent Box a bad reputation as merely a means for large technology companies to minimise their tax bill. What is difficult if not impossible to glean from these figures is the impact the Patent Box may have had on innovation in the UK. To what extent has it resulted in companies other than GSK investing more in UK innovation? Assuming that the Patent Box could make UK companies already investing in R&D more profitable or competitive, how can this effect be valued? It may be expected that the new scheme will improve the correlation between use of the Patent Box and investment in UK R&D due to the requirement of accounting for relevant R&D in the UK. However, further research will be needed to link the tax claims to both the economic impact on the UK as well as the impact on UK innovation.