The government's "patent box" is the tax avoidance package companies have been begging for

It might incentivise innovation, but it definitely incentivises paying far less tax.

The Conservative party back-benches are seething with rebellion. Not only do ministers deplore David Cameron for an un-Tory like attitude toward gay marriage, in recent weeks he has further upset them with a positively radical spiel directed against those super-corporations the conservative leader suspects of tax avoidance:

Any businesses who think that they can carry on dodging their fair share ... need to wake up and smell the coffee.

However. Refreshing though the rhetoric certainly is, the actions of the Government seem to tell a different story. Corporation tax will have fallen from 28 per cent to 21 per cent toward the end of the Government’s first term in 2014 — and this will translate into a loss of roughly £5 billion in tax revenues each year as those cuts are enacted (according to 2011 estimations by the Treasury).

The buck doesn’t stop there. In order to better facilitate corporate needs, HM Revenue and Customs is set to introduce a new form of tax relief for businesses due to begin in April this year. It’s called the Patent Box. Ostensibly, it means that a company which shows sufficient innovative nous by patenting innovations will be entitled to a tax break of 13 per cent, applied to the value of the product. In theory this should provide impetus for companies to conceive fabulous new technologies, and give a spurt to growth and development thereby. Right?

Well not quite. The first problem is that said companies are not actually required to own the patent themselves in order to attain the tax break. They can simply lease a patent from the original patent owner; consequently there is no real incentive to invent stuff creatively and in-house, so to speak. But the most salient fact about the Patent Box is that it does not apply to the patent in isolation. A company could, for instance, produce a tractor, and if that tractor was possessed of a patented right view mirror, the revenue from the whole vehicle itself — not only the mirror — would be subject to same overall and significantly larger cut in tax.

In other words, a measure which appears to contain a degree of legitimacy, in fact becomes yet another way for big corporations to achieve massive, unwarranted tax slashes on their products. And this is ironic. The Conservatives always pride themselves on encouraging small business development, perhaps because this provides a highly effective propaganda sheen — allowing their PR initiatives to be expressed in terms of hard working individuals and entrepreneurs rather than faceless corporate monoliths. But the Patent Box will only serve the latter. Small businesses do not have the purchasing power to buy in bulk the products which will benefit from the tax cut, nor can they afford to gamble with new technological innovations, nor can they divert money into buying up the patents of others.

Part of the whole problem lies in the way in which the government develops Controlled Foreign Companies (CFCs) regulations. One of the lead advisors who helped the government to devise the Patent Box was one Jonathan Bridges — a tax advisor for KPMG, an accountancy company which has no remit outside ensuring the lowest tax returns for its corporate clientèle; it has, therefore, no commitment to any notional "national interest".

The use of the representatives of corporate power to provide advice on the means by which that power should be channelled in socially effective ways makes about as much sense as employing a local war lord to advise on the committee of Amnesty International. But despite its connotations, the practise of employing huge corporations to help devise precisely the laws which are supposed to regulate them is one which both the current and the previous Government have engaged in. At the time of the transition to the coalition government, Labour had already set up working groups for consultations regarding CFC reforms; panels which included representatives of HSBC, Vodafone and Shell — all major multi-nationals and all involved in controversies regarding tax evasion.

The current Government has an objective rationale for its position which isn’t simply an expression of neo-liberal ideology and partisan politics. These super-companies have genuine power — and the ability to decamp to another country taking thousands of jobs with them. Like petulant, spoiled children, they are always on the verge of tantrum, should their desires not at once be met. In the midst of an economic crisis there is a cogent argument that any single Government must of necessity make their tax rates as favourable as possible in order to attract those companies and secure those jobs.

But the problem with such an argument lies in its generalisation. If every government follows suit, slashing corporate tax over and over in order to remain competitive, and if all governments adhere to the strictures of such competition, we are at once locked into a downward spiral, a race to the bottom in which the benefits gained from corporation tax are increasingly illusory.

And it is important to recognise that this is exactly the type of cycle which got us here in the first place. We were sold on the need to slash regulations in the finance industry, and look what happened. By playing this game the government are not responding pro-actively to the crisis, they are adopting the very logic which led to it.

How can these companies be regulated? By people putting pressure on their governments for sure. But also by directly targeting the companies themselves through grass-roots activity and customer boycotts. Following mass protest, Starbucks was recently "persuaded" to agree to pay £10m in corporation tax in the UK for each of the next two years. A drop in the ocean certainly. But nevertheless an indication that, ultimately, it is the consumer who has the ability to make or break a company.

Innovate on the mirror, profit on the tractor. Photograph: Getty Images
Getty
Show Hide image

How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

0800 7318496