The Patent Box, effectively a reduction in corporation tax associated with profits generated from patented products or processes, was introduced last April into the UK. The aim was to make the UK more attractive to business and to encourage innovation in the UK. Although Patent Box may have helped to some degree, it may not provide sufficient incentive, particularly for small companies or SMEs, to increase R&D budgets and innovation.
The Patent Box allows a 10% corporation tax rate to be applied to profits generated from a patented product or process. Whilst, on the face of it, this may sound like a good incentive for companies to innovate, the system is complicated and involves the payment of upfront costs (e.g. patenting costs). Particularly, the 10% tax rate is not available on all profits obtained from a patented process or product; any profit related to routine activities and to a brand must be removed before the 10% tax rate is applied. Additionally, whilst Patent Box was introduced in April 2013, it is in fact being phased in over a 5 year period. Thus for 2014, only 70% of Patent Box profits are entitled to receive the 10% corporation tax rate, after the profit related to routine activities and to branding are removed. The saving associated with Patent Box, particularly until it becomes fully effective in 2017, may therefore be less than anticipated.
Whether this saving in corporation tax may encourage innovation in the UK is debatable. There is no doubt that large companies with established patent portfolios and large sales relating to patented products or processes will see immediate benefit from the Patent Box. Such companies may consider using the saved corporation tax to innovate further in the UK. However, for smaller companies with small patent portfolios or no patents, the incentive of a potential future saving in corporation tax, may not be enough to encourage innovation. Particularly, upfront costs will need to be incurred without any guarantee of a large enough later tax saving to recoup these costs. Thus, a smaller company may need to firstly invest a substantial amount in R&D in order to develop a product or process, which must be patentable (i.e. novel, inventive and capable of industrial application). A patent further needs to be granted to the developed product or process (typically a UK or EP patent) before Patent Box can be claimed. The patenting process is of course also associated with costs, in the form of official patent office fees and patent attorney fees (although these costs can be minimised if only a UK patent is applied for). Finally, since Patent Box is complicated, the services of an accountant will likely be necessary when calculating how much profit from sales is entitled to the reduced tax rate. The costs involved in developing a product or process which may qualify for Patent Box may therefore be high. This results in a risk, particularly for smaller companies, that the product or process developed may not make enough profit and therefore enough savings through the reduced tax rate, to offset the initial costs, or even to offset the additional costs of patenting/accounting which are required to claim Patent Box.
Patent Box therefore only rewards innovation which results in a granted patent and which results in high sales of a product/process. There is no reward from Patent Box for any other type of innovation, e.g. research which does not result in a patentable product/process or for products which are newly designed (and therefore may be eligible to be protected as a Registered or Unregistered Design), but which may not be patentable. In view of this, it is questionable whether Patent Box has gone far enough to support innovation in the UK and particularly to encourage small companies and SMEs to invest in innovation.