Patent Box: A good policy?

Currently the UK has a lack of investment in research and development, thus is lacking in innovation. Considering it’s GDP, the UK is behind Slovenia in the number of patents submitted and behind many of its rivals including the USA, Japan and even Korea for major innovations that are patented worldwide. Therefore, the government has realised that something needs to be done to tackle this, so have created a patent box scheme, to give an incentive for firms to invest and hopefully bring innovation in the future. The policy allows companies to receive a lower corporation tax rate, at 10%, on profits made from patents developed in the UK. As with any policy, this can be evaluated to see if the policy is likely to be considered a success, or more likely to be a failure.

On the surface, this scheme seems very well designed. With the UK having a major problem with low levels of research and development, investment and innovation, this scheme is directly targeting those problems, providing direct incentives to companies to carry them out. Hopefully, this will mean that businesses take up this policy, bringing economic growth and spill over benefits to the economy. This will be with more jobs and higher tax revenue, helping to reduce high unemployment and for the government to achieve its fiscal mandate. With these benefits, if the policy works it should bring numerous benefits that the UK economy could really benefit from at the current time, while also bringing innovation that should benefit the country for many years to come.

In addition, this policy could encourage companies to choose the UK. In a globalised world, there is fierce competition for businesses to locate in your country. For example, companies such as Google open offices in areas such as Dublin, where they are able to take advantage of the low tax rates, while still being able to get access to skills and the British market. As a result, this incentive should hopefully entice companies to choose the UK, whereas they might currently choose Israel, who have low taxes on innovations, benefitting the UK economy. At the same time, it could encourage entrepreneurs to start a business, which will yet again provide growth, jobs and numerous benefits if it does become successful, especially in the technology space where small companies have grown very big, such as Tumblr or Facebook. However, patents are expensive to register, so this will likely only help large businesses.

On the other hand, there are also various disadvantages and problems with the policy. This is because in practice, it is unlikely to work, with numerous factors influencing companies decisions about where and when to invest and carry out research. These could include the skill level or the economic climate, meaning that it will be unlikely that this policy actually brings any additional innovation to the UK. In turn, this could actually create a deadweight loss, with no new benefits seen and companies who would have already carried out research, without the policy, just benefitting. This is also important that companies already have the incentive to invest, being able to make profits from their innovations and ideas, thus this scheme is unlikely to help with that.

Furthermore, the actual design of the policy creates problems. This is because companies are able to carry out the research elsewhere, and then register them in the UK and receive the Patent Box benefit. Therefore, the policy is used, but the UK doesn’t actually gain from increased innovation or investment, which the policy is primarily designed to target. It’s also hard to value patents from this work, especially if they don’t have a numerical value. This is because many patents go into one product, so it is hard to measure how much value should be placed in the Patent Box. In turn, this is likely to complicate the tax lax even more, just benefitting lawyers and accountants. Finally, many other countries, such as France and Belgium are also implementing similar ideas, so the UK gains no competitive advantage and just keeps up the status quo, likely meaning no additional benefit will be seen.

In conclusion, although on the surface the idea might seem that it is a good policy, helping to tackle the UK’s investment and innovation deficit, while bringing many positive spill over effects through increased jobs and corporate activity, in practice things are likely to be different. This is because incentives to invest already exist and with many factors influencing decisions, a Patent Box is unlikely to be a major factor. At the same time, it’s a difficult policy to administer and combined with the fact that many countries are doing the same thing, experts, such as the Institute for Fiscal Studies, have proclaimed that it isn’t a very good idea. Perhaps it would be better to use the £1 billion that the scheme is predicted to cost and just fund research directly, ensuring that research actually increases.