Patent Box Brings Relief to UK Investments

Her Majesty’s Revenue and Customs office (HMRC) just released the first official statistics on the United Kingdom’s patent box tax relief program. The initial numbers indicate the program is working as planned. Countries with high corporate taxes that wish to grow their innovative economies should be sweating.

The 2014-2015 fiscal year saw a 37% increase in the number of companies applying for relief and an astounding 78% increase in the total amount claimed, amounting to £651.9 million, or $883 million in US dollars.

The patent box policy allows companies to be taxed at a 10% rate on profits derived from intellectual property, an alternative to the 20% main corporate tax rate.

The UK is certainly home to all the major ingredients IP-intensive industries look for when deciding where to invest: leading research universities, a number of highly trained scientists, access to financial markets, and connected to complex productivity hubs. But, so do a number of other countries. The tax incentive created by the patent box serves as an additional inducement attracting FDI that generates jobs and innovation.

The HMRC statistics reveal 73% of companies that applied for relief are medium to micro-sized enterprises evenly spread across the kingdom.  London, for instance, is home to only 10% of businesses that applied.

Last year, the patent box regime was updated to include recommendations by the OECD Base Erosion and Profit Shifting office to restrict eligible relief to R&D research conducted only in the UK. 

Patent boxes currently exist in a number of OECD countries including France, the Netherlands, and Spain. China has a patent box as well that reduces the rate of taxable profits to between 0 and 12.5%. Next year China is predicted to surpass the United States in receiving the most patent applications.

Italy has one of the most ambitious patent box regimes aiming to incentivize patents and copyrights. Professor Cesare Galli recounts the latest Patent box developments in Italy and the OECD in the 2017 International Property Rights Index.

The United States does not have a patent box regime, instead, it has the highest statutory corporate tax rate in the OECD, a whopping 39.1%. According to the Tax Foundation the U.S. corporate tax rate is only bested by the United Arab Emirates, Puerto Rico, and Comoros (Chad lowered its corporate rate in 2015).