New British tax-cuts-for-patents scheme criticised

A new tax cut tied to the number of patents a business owns could lead to a wave of trivial patents being filed, favour big businesses over small businesses, and distort research priorities, speakers at the London Patent Summit warned today.

Businesses have broadly welcomed the Patent Box tax scheme that will see them getting a billion pound windfall in tax cuts over the next few years. Corporate tax is currently at 28 per cent, it will reduce to 23 per cent by 2013 and as an extra sweetener, revenue that is "attributable to patents" - will only be taxed at 10 per cent, starting in April 2013.

A consultant from Deloitte was warmly in favour: "There are no bad sides to this!" said Carmen Aquerreta, sketching out how the scheme will affect business at the Summit today.

"The tax guy will just have to get as much as possible into the 10 per cent bracket."

Many business execs are not even aware of what patents their company holds, said Aquerreta, stating that that would all change when the Patent Box scheme comes into force next year.

"Normally a head of tax will have no idea if there is any patents in the company. So he needs the input of the IP team, the R&D team," she said. The tax scheme will lead to a big increase in business patenting, she predicted:

You would tend to think that companies in manufacturing and technology industries would have patents. But that is not always the case. So now you will have the tax guy pushing R&D to patent their things.

For the new scheme you don't even need to own the patent to claim lower rate tax: having an exclusive license on someone else's patent (even just exclusive to one territory or to one sector) is good enough.

And - as Aquerreta pointed out - even if only one small part of your product is patented, you can claim revenues from the whole thing. For example if one component in a plane you make is patented by you, or you hold an exclusive license for it, all the revenue from that product will be taxed at 10 per cent, not 23 per cent.

The idea is that businesses will put the tax money they save into R&D, fuelling further innovation and further patents.

Criticism

But even at the London Patent Summit, a industry event sponsored by Deloitte and several big legal firms - and held at the London Stock Exchange - there were some criticisms of the measure.

Chi Onwurah, a Labour shadow biz minister, pointed out that this would reward big companies rather than small ones, because the small innovative companies taking a risk on new technologies and business models usually don't turn a profit in their initial years. Because they aren't making profit, they're not paying tax, and they're not benefiting from tax breaks. There needs to be investment too, she said:

"These small companies need investment now because they won't be making a profit now. Twenty-three percent of nothing is nothing, ten percent of nothing is still nothing."

Everyone was in favour of innovation, Onwurah said, but patents were only one way of measuring that and it could distort company practice towards favouring patents rather than innovation itself:

What we need to sustain growth is innovation - real innovation, and the question is whether patents are the same thing. For me, patents are not an end in themselves, we'll see what Patent Box achieves.

Haydn Evans, of CPA Global argued that the Patent Box scheme could distort business too: on the one hand leading to companies patenting everything they can lay their hands on - "we may see people gaming the system - filing lots of patents."

And on the other hand, the Box system could also disincentivise firms away from innovation:

If you have just one patent needed in an aeroplane to claim all the profits at 10 per cent tax, where's the incentive to do more once you have that?

The measure will be of particular benefit to technology companies and manufacturers - sectors where much of the income can be attributed to patents.

Despite the flaws in the Patent Box idea, it was felt that something should be done to keep the UK competitive. There was a lot of praise and apprehension about China's aggressive approach to encouraging new patents, where the government goes even further in incentivising patents: patent filers get cash and even housing when they are granted new patents. ®