Greater scrutiny on, and potential changes to, R&D tax credits may make them less reliable as a sole source of tax relief. Peter Corley of Gateley Capitus and Nicholas Ferrar of Adamson Jones explain why now’s the time to explore the Government’s under-used Patent Box scheme.

Nicholas Ferrar

Peter Corley

R&D tax schemes provide valuable support to companies, but in recent years they’ve been somewhat abused. The corporation tax reductions and cash injections they offer have motivated some companies to claim for costs that do not qualify under the schemes, leading HMRC to increase scrutiny of claims, and even propose changes to the process altogether. Inaccurate, inflated, or fraudulent claims face rejection at best and penalties at worst.

Patent Box, however, is a tax incentive offered by the UK government that could offer a useful alternative or supplement to R&D tax relief. It encourages companies that have created a patent to undertake research and development and protect their patent’s intellectual property. Under the scheme, any profits derived from the qualifying patent – as well as European rights such as SPCs, plant breeders’ rights, and plant variety rights – are eligible for a corporation tax rate of just 10 per cent, rather than the headline rate of 19 per cent rising up to 25 per cent from April 2023.

An underused incentive

Despite these advantages, the UK’s Patent Box tax relief scheme remains underused. According to HMRC statistics issued in September 2022, just 1,535 companies are projected to claim under Patent Box for 2021/22, with an estimated total tax relief value of £1.2m.

This number is surprisingly low when you consider that the UK Intellectual Property Office (UKIPO) granted 11,000 patents in 2021 – 61 per cent of which were owned by patent applicants in the UK.  The European Patent Office also granted 3,206 patents to UK-based applicants in 2021. That means approximately 10,000 eligible new patents each year are missing out on the benefits of the Patent Box scheme.

With patents lasting 20 years from their application date, however, there is also a legacy of patents dating back to 2002 that are not being used to generate tax savings.

Unboxing the benefits

SMEs are arguably missing out the most, claiming just six per cent of the relief projected for 2021/22. There are several reasons for this. As well as a general reluctance to apply based on the belief that the financial return won’t be worth the effort, many companies don’t realise that their innovations are applicable to patent protection. If they are, there’s a misconception that the scope will be too narrow.

Patent costs can also act as a deterrent for SMEs, which is why it is helpful to consider them alongside the relief available under a Patent Box scheme.

Patent Box tax relief can be applied to the profits obtained from selling patented products – including product families that incorporate a patented component – regardless of where they are sold. This means that only a UK patent is required for profits to fall within the Patent Box scheme, although you will still be required to pay UK corporation tax. This relief is also available for a patent’s lifetime, which is a maximum of 20 years. The amount of tax relief obtained under the scheme is highly likely, therefore, to outweigh the initial cost of obtaining the patent.

Does your company qualify?

In broad terms, a company qualifies for Patent Box if it takes profits from patents that it either owns, or exclusively licences. It must also undertake qualifying developments on those patents. To be eligible, patents must be granted by the UKIPO, the European Patent Office, or specified IP authorities within the European Economic Area.

Increased scrutiny on R&D tax relief claims mean that qualifying companies could receive less relief, particularly if this is the only scheme to which they have applied. Furthermore, following the recently announced changes to the R&D schemes in the Autumn Statement, some companies will see their claims reduced or denied if they have not received correct or up-to-date advice.

Whether your company wants to explore the patentability of its designs, or claim tax relief for existing patents, it’s vital to seek professional advice. Not only will you maximise the commercial benefits of your work, but you will also facilitate continued innovation and maintain a competitive advantage in your sector.

Gateley’s tax professionals and patent attorneys can offer advice and support on all aspects of Patent Box tax savings. For more information, please visit: https://gateleyplc.com/services/patent-box/