Clause 19 - Profits arising from the exploitation of patents etc

Part of Finance Bill – in a Public Bill Committee at 11:15 am on 12 June 2012.

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Photo of David Gauke David Gauke The Exchequer Secretary 11:15, 12 June 2012

It is a pleasure to serve under your chairmanship once again, Mr Bone. Clause 19 introduces the patent box. The patent box will apply a reduced 10% rate of corporation tax to profits from patents and related types of intellectual property. The patent box will help to maintain the UK’s position as a world leader in patented technologies and encourage companies to locate high-value jobs associated with patents here.

Encouraging businesses to develop and use their patents will play a key part in supporting a strong and growing private sector. Clause 19 and schedule 2 could benefit up to 5,000 of our most innovative companies. They will benefit a wide range of sectors, particularly high-tech industries such as life sciences, manufacturing, electronics and defence. They are equally applicable to the smallest and to the largest companies.

The patent box will benefit active, innovative businesses that hold or exclusively license patents. Companies must have developed the patent themselves or be actively managing it in order to be eligible for the patent box. Companies can benefit however they choose to use the patents in their business. The technology can be licensed, included in patented products, or used in internal processes or to provide services.

Companies will be able to apply the 10% patent box rate to profits that are attributable to patents, but not to profits that are attributable to routine activities or to commercial brands. For many companies, the rules allow a largely formulaic approach to simplify the potentially difficult task of determining patent profits. This should improve certainty and minimise administrative burdens. My hon. Friend the Member for Amber Valley asked what would happen in the case of a car, an element of which related to a patent. All turnover from the car would be included, but a routine profit element would be excluded—10% on certain costs—as would a marketing return profit. Not all the profit on such a car would be included, therefore, but there would be an amount to reward the technological innovation and intellectual property in the patent.

The patent box will be phased in over five years from 1 April 2013, with the full benefits available from April 2017. It is expected to cost £350 million in the first year, rising to £960 million in steady state.

I will also outline for the Committee future changes. To qualify, the patent must have been granted by the UK or European patent office. Schedule 2 includes a power to include patents granted by the patent offices of other EEA countries. A statutory instrument will be introduced before April 2013 under the negative procedure to include patents from EU countries with similar patentability criteria and patent examination processes to the UK. A draft has been provided to the House.

Powers are also included to permit the Treasury to make consequential changes as a result of changes in EU or national law relating to patents and other qualifying rights; to adjust the definitions for the types of expenses  used to calculate the excluded routine profits of the company; and to update references to international standards for calculating tax profits. The powers will be used to keep the regime up to date and to provide additional clarity if required. We will also keep the regime under review to ensure that it is benefiting business in the way intended, and we will take appropriate action if aggressive attempts are made to exploit it for tax avoidance.

Amendment 24 proposes that the Government publish a review of the impact of the patent box on business and of opportunities to introduce other targeted support for business. As I have discussed in relation to clauses 5 and 6 on corporation tax rates, the Government continue to prioritise reforms to the corporation tax system as part of their action to repair the UK’s model of economic growth. It is because the private sector is critical to the economic recovery and tackling the deficit that the UK must demonstrate that it is open for business.

The Government have taken action to improve the UK’s tax competitiveness in a number of areas. This action includes reductions in the main rate of corporation tax, which will benefit all companies; reform of the controlled foreign companies regime; and introducing an above-the-line research and development tax credit, which will support further R and D investment in the UK by improving the visibility and certainty of the credit. The patent box is also a key part of that commitment.

In November 2010, the Government published the corporate tax road map, which set out a five-year plan for the Government’s approach to reform of the corporate tax system. The proposals were subject to open and transparent consultation with business. The Government have helped to provide stability by delivering the reforms to the timetable first set out 18 months ago in the road map. It is the Government’s view that, in general, a low corporation tax rate with fewer reliefs and allowances will provide the best incentive for business investment, with the fewest distortions. The corporate tax road map has given certainty to business that the tax system will be stable, and therefore the Government are not intending to make any further significant changes at this time. Producing another report on introducing further targeted reliefs is therefore unnecessary.

The Government also routinely publish detailed information on the corporation tax system: HMRC publishes detailed statistics on corporation tax receipts; the OBR publishes information on the corporation tax forecast in its economic and fiscal outlook; and, at Budget, HMRC publishes detailed information on proposed changes, in particular tax information and impact notes and the policy costings document.

HMRC’s existing arrangements will ensure that the impact of the patent box is effectively monitored. This will include capturing data on the level of uptake of the regime and the benefits that the regime delivers to business. However, full information covering the impact of the regime will not be available for several years. The immediate impact is clear from the reactions of business to the introduction of the regime.

I am delighted that already the introduction of the patent box has resulted in £500 million of investment by GSK, including a new manufacturing plant in Cumbria and generating about a thousand new jobs. GSK’s  announcement of its intention to invest was first made in November 2010 in response to the corporation tax road map, not in 2009 when the previous Government announced the patent box. It was, after all, contingent on the successful design of the regime: something that we have been able to deliver.