The UK Patent Box is a scheme, introduced in 2013, through which UK-based companies can benefit from a reduced rate of corporation tax (10%) in relation to profits attributable to patented technologies. One of the aims of the Patent Box is to incentivise R&D and innovation in the UK.

Some have criticised the scheme as being nothing more than a cushy tax break for “big pharma” without actually stimulating R&D. As reported in the article linked below, John McDonnell, the shadow chancellor, has recently said that for this reason the scheme should be reformed or scrapped.

Four points ought to be mentioned in light of these comments:

i) The effectiveness (or not) of the Patent Box has not yet been adequately assessed. It seems too early to criticise the scheme for failing to drive R&D. Indeed, this HMRC announcement states that the first release of Official Statistics on the Patent Box Relief will not be published until 14 September 2016. The release will include the number of companies claiming the relief, broken down by company sizes, industrial sectors and government office regions, and the amount of the relief claimed in 2013-14. Perhaps then we can begin to judge if the system is having the intended effects.

ii) The Patent Box scheme has in fact already been reformed in an attempt to address deficiencies of the type raised by McDonnell.

Even under the original rules, there was an attempt to make qualifying for the tax break require more than simply buying or licensing-in patented technology. It was necessary to prove that the company had contributed to the development of the patented technology or its application. However, there was not a requirement for the UK-based company to have borne the cost of a significant proportion of R&D itself.

Changes to the scheme, effective from 1 July 2016, have attempted to rectify this deficiency. Now, where the total expenditure on i) sub-contracting R&D to “connected persons” (e.g. an overseas subsidiary or sister company) and ii) the cost of acquiring IP rights, is more than 30% of the total R&D expenditure (including that subcontracted to “unconnected” third parties), then the proportion of profits that qualifies for the lower tax rate is reduced. The aim of this additional calculation is to prevent multinational companies moving IP into the UK to benefit from the reduced tax rate following R&D performed elsewhere.

iii) Was the main aim of the Patent Box system really to increase R&D in the companies claiming tax relief? Several other countries have Patent Box systems or other R&D-based tax breaks. Rightly or wrongly, perhaps the aim of the Patent Box was to incentivise big pharma remaining in the UK. As the BIA succinctly noted here, large companies are a crucial part of a healthy life science ecosystem in the UK.  GSK announced this week that they were increasing investment in the UK and cited the Patent Box as one of the reasons for doing so (here).

iv) Of course, it is not only big pharma who can benefit directly from the Patent Box. The tax breaks are available for UK-based companies of any size with qualifying IP and R&D expenditure.