Recent headlines relating to Pfizer’s bid to take over AstraZeneca have shone a bright light onto an area of tax that has previously had a surprisingly low profile. The Daily Telegraph on 5 May ran a headline “American companies target the UK for tax“, whilst The New York Times on 29 April approached the same subject from the US perspective with “Pfizer Most Likely Just the Tip of the Tax Sword”. After a year of being very much overlooked by the media the Patent Box tax regime is now centre stage.

Patent Box came into force on 1 April 2013 and provides a substantially reduced rate of corporation tax for profits generated from a product covered by a UK patent. The rate of corporation tax for qualifying profits is currently 13.6 per cent, and will reduce to 10 per cent in April 2017. The aim of the Patent Box scheme, as stated by HMRC, is to provide an incentive for companies to retain and commercialise existing patents and to develop new innovative patented products in the UK. Underlying this is the stated aim of encouraging companies to locate high-value jobs associated with the development, manufacture and exploitation of patents in the UK. 

In the tax year 2013/14 the Patent Box is estimated to have cost the Treasury around £300m. The Treasury has estimated that it will cost around £1 billion per year by the time the tax reduction has fully tapered in in 2017. But has it changed the behaviour of companies in the way that was intended? 

Now that companies derive a direct financial benefit from patents that cover their products, following a slow start they are, unsurprisingly, keen to find out which of their products are covered by patents and which are not. This shines a spotlight on companies’ patent activity which often was not there previously. Company boards, which were often relatively uninterested in the process of identifying inventions and protecting them, now want to know what steps are being taken to ensure that innovations are being identified and protected. This drives best practice by prioritising important questions: Why are our innovative products not protected by patents? Why does such a large proportion of our patent portfolio not cover any of our products? Who is responsible for ensuring that our innovations are recorded and considered for patent protection? 

Patents and those that work with them are now more interlinked with other parts of a business. Exchanges between accountants and engineers that possibly never previously took place are now commonplace, as accountants seek to understand the manner in which products are covered by patents.

Another effect of Patent Box is that obtaining grant of a UK (or European) patent can now have a direct effect on a company’s bottom line. This is obviously beneficial for in-house IP counsel as a company’s finance director can now see a direct financial benefit to his or her patent expenditure (instead of merely an often intangible one). However, the flip side of this is that it ratchets up pressure on patent attorneys since failure to obtain a patent can give rise to a substantial and directly quantifiable financial loss.

Although the Patent Box scheme appeared initially to provide the most benefit to large corporations such as pharmaceutical companies, our experience in practice is that SMEs are also keen to get in on the act. We have seen SMEs attempt to devise patentable improvements of existing products in order to bring them within the scope of Patent Box. The results have been important improvements to those products, making the products more competitive and thus generating more sales and profits for the companies involved. Thus, although Patent Box can be seen as a relatively crude lever, there is at least anecdotal evidence that it is driving the kinds of behaviours that the Government is seeking to promote.

When the Patent Box scheme was formally introduced in the budget of 2013 GlaxoSmithKline announced later the same week that it was going to invest £500m in manufacturing in the UK. This announcement had all the hallmarks of being stage-managed, and there has been very little in the media regarding the Patent Box since then. However, the announcement of the Pfizer take-over bid last week and the clear indication that bid is partly driven by tax planning demonstrates that Patent Box is now having a very significant effect on the UK’s commercial landscape and will continue to do so in the years to come.