Why are SMEs failing to fully take advantage of Patent Box tax breaks?
On paper, changes in UK corporation tax have made Patent Box tax breaks increasingly attractive to SMEs, but recent statistics show that UK businesses are not taking advantage of the opportunity to reduce their corporation tax to 10%.
What is Patent Box?
Patent box was first launched in 2013. Under this scheme, companies holding a UK patent might be able to reduce their corporation tax for at least a proportion of the profit they make on products covered by the patent.
Eligibility
To qualify, the patent must be owned or exclusively licenced by a company paying UK corporation tax. The company (or an affiliate) must have also made a significant contribution to the development of the patented invention or a product incorporating the patented invention.
Since the introduction of Patent Box, the number of patents granted to UK applicants by the UK IPO and EPO has increased from around 4,500 to around 7,250. In the same time, the number of Patent Box claims increased from around 800 to around 1600 in 2019, but has generally plateaued since then.
While some patents might be granted to the same company, it seems more than likely that many companies are missing out.
The most recent statistics for patent box claims (covering 2022-2023) show that only 6% of the financial relief was paid to SMEs or smaller companies. This means it is likely the smallest companies that could most benefit from a reduction to their tax burden are the one that are missing out.
The gap between patent box statistics and patent filings may only be part of the picture on the people missing out on tax relief.
Another form of tax relief that can be claimed by many companies is R&D tax credits. To qualify for R&D tax credits, a company must seek an advance in a field of science or technology. In 2022-2023, over 65,000 companies claimed these credits.
Just because a company is claiming R&D tax credits does not necessarily mean it could be granted a patent. However, there is certainly a significant overlap in the work that qualifies for R&D tax credits and patents, and so thousands of companies could be missing out on Patent Box tax breaks.
R&D tax credits and Patent Box are designed to be complementary. R&D tax credits can be used to provide income during the development of a product or system, and Patent Box tax breaks can help once the product is mature and on the market.
What is the Patent Box claim process?
Profits related to patent income can be eligible for Patent Box. This includes licence fees and income from sales. Even if the patent only covers a small component of an item, the profit from the whole item can be eligible if it is incorporated into a single product but care needs to be taken where items such as after sales care or installation are included as they would likely not qualify. Qualifying income is subject to a detailed calculation that must be undertaken to determine what proportion of the profit is eligible for the lower tax rate.
Barker Brettell work with a number of accountants who are experts in Patent Box claims, and we would be happy to introduce you.
How do I find out more?
If you have patents but are not claiming Patent Box; a company that is claiming R&D tax credits and does not have patents; or, a business advisor with clients who may benefit from this tax incentive, Barker Brettell can help you secure your IP and set up a Patent Box claim. Please contact the author to continue the conversation.
