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One of the key measures introduced by in the Government’s proposed reform of the corporation tax (CT) regime will be ineffective and is unlikely to have any positive effect for UK companies, according to a leading think-tank.
The Institute for Fiscal Studies (IFS) warned that the reduced CT rate of 10% on income derived from patents, scheduled to come into effect in April 2013, will lead to a large reduction in UK taxes gleaned from companies’ innovations.
The organisation went on to claim that the so-called patent box is ‘poorly targeted at promoting research’ and will ‘add complexity to the tax system’.
‘It is far from clear that any additional research resulting from the policy will take place in the UK,’ said the IFS, noting that the patent box had been most warmly received by ‘a small number of large patenting firms for which the tax savings will be greatest’.
Ministers have suggested that the UK will benefit from the ‘additional tax on the consequential profits’ associated with patents – but the IFS said it believes the patent box measure will result in a substantial reduction in government income because the boost to the public purse would be outweighed by the lower CT rate.
The think-tank also criticised the policy – the likes of which exists in Netherlands, Belgium, Luxembourg and Spain – for targeting the income that results from patented technology not the research itself, and for adding to the administrative burden of the tax system by requiring ‘policing to ensure that both income and costs are being appropriately assigned to patents’.
Also, under European law, eligibility criteria for inclusion in the patent could not include restrictions that patentable technologies be created in the UK. It would therefore be possible to hold patent income in the UK without co-locating any associated real activity, said the IFS.
