The Patent Box: benefits, losses and 'tax technicalities'

By Wendy Bradley
August 4, 2013

Ulverston in Cumbria is a quite lovely part of the world. It has a fine array craft shops, some spectacular tea rooms, coffee shops and delis, and even a statue and museum devoted to its most famous son, Stan Laurel of Laurel and Hardy. An old friend occasionally lets me use her house near Ulverston as a writing retreat when she goes on holiday and I sit in her garden or walk down to the village and watch the windmills turning.

In between pounding the keyboard I also ponder what people actually do all day if they live there all the year round and not just in the holiday season. Where do they work? How do they get there? We can’t all make a living making each other scrumptious tea and cakes, after all.

There were 175 people unemployed and claiming jobseeker’s allowance (JSA) in Ulverston last month (June 2013: figures from table 20 here). There were 8238 people claiming JSA across Cumbria last month but between March and May 2013 there were only 4306 job vacancies posted in the entire region. I’m guessing, then, that the prospect of a GlaxoSmithKline factory costing £350 million and employing 500 people is great news for the area. Just looking at construction of the factory itself we’re talking about 300 jobs. So even though it will take at least another six years before the plant is up and running, it looks like Ulverston is due some better times.

I was thinking of Ulverston the other day when I saw that German finance minister Wolfgang Schäuble is calling for the UK 'patent box' to be banned.

What is the patent box, do I hear you ask?

The patent box is a tax technicality: from April of this year, any company that makes profits out of a patent can pay a lower tax rate on that bit of their profits. So for the example of a pharmaceutical company, the profits they get from a drug they have developed will be taxed at a lower rate - 10 per cent - during the life of the patent.

Is this a good thing?

Well, look at the impact assessment - the TIIN, tax information and impact note - that came out with the legislation. It says that the Exchequer impact year-on-year will be:

2012-13 - -----

2013-14 - £350 million

2014-15 - £720 million

2015-16 - £820 million

2016-17 - £910 million

These figures are presented in table 2.2 of the Budget. The Office for Budget Responsibility has included these numbers in its forecast.

Or, to put it another way, HMRC is going to collect £350 million less tax this year because of the change, and this will increase to a £910 million giveaway by 2017. It’s a tax break of millions, given to big companies.

But then, the coalition agreement is upfront about the government’s objectives for the tax system: they want to make it “more competitive, simpler, greener and fairer” (para 29 on page 30). The “competitiveness” they are seeking, though, isn’t competition between companies, the kind of competitiveness that was supposed to make energy supplies or train tickets cheaper because different companies would compete for our business. No; this is competitiveness between countries. The government wants to compete with other countries to attract companies to invest in the UK by offering them a lower tax rate. This is why EU finance ministers are being asked to “review the impact of such tax incentives on attracting corporate investment”, because if GlaxoSmithKline builds its factory at Ulverston, it isn’t building it in Germany or Greece.

Again, though, is this a good thing or a bad thing?

Look again at the impact assessment. The next field after the exchequer impact (the amount of tax the legislation will raise or, in this case, lose) comes the “economic impact”. It’s worth looking at this one a bit more closely.

UK sectors such as pharmaceuticals, life sciences, manufacturing, electronics and defence use patents and are likely to benefit from the Patent Box.

Well yes, we could have worked that one out for ourselves. It’s not likely that industries that don’t use patents will benefit from a tax change tied to patents. What else?

Where revenue-generating patents are held by unincorporated businesses, the introduction of the Patent Box will likely increase the incentive to incorporate. This is likely to be tempered as businesses will normally have already incorporated to qualify for the Research and Development Tax Relief.

Yes, you read it right. Companies that register patents are very likely already to have had Research and Development tax relief - in other words, to have been able to reduce their tax bill by deducting up to 175 per cent of the amount they spent on research against their profits for tax.

So a company pays less tax (or even gets a repayment) when it’s researching, and then pays less tax when it manufactures and sells something it invented.

And finally: The introduction of the Patent Box is likely to encourage investment and economic growth as well as prevent the movement of intellectual property offshore by innovative businesses who otherwise might invest elsewhere.

So we know it will cost something like £900 million, and what we get in return is that it is “likely” that there will be some investment and economic growth?

How likely? And, for that matter, how much?

I don’t want people in Ulverston to be unemployed. I’d like the economy to grow a bit so we can all afford more of the things we need. But I don’t want to give away £900 million a year to big business unless I’m pretty sure I’m getting a good deal. But how much does a job cost, exactly? What’s it worth to the person who has it? What’s it worth to the country that gives tax breaks to the company that creates it?

So here’s a couple of modest proposals: first, wouldn’t it be a good idea if the government were to look at the benefits, as well as the costs, of fiddling about with the tax system? And, second, maybe have a word with the competition? If EU finance ministers are getting together, why not forget about arguing over who’s winning what competition with whom, and instead look at working together for a bit? Just a thought.

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© Wendy Bradley is a former member of HMRC’s Better Regulation team. She is undertaking doctoral research into the relationship between tax simplification and better regulation. Her tax blog can be read here: http://tiintax.com See also: http://www.taxation.co.uk/taxation/biography/wendy-bradley

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