18 November 2023
HMRC’s latest statistics show that only 1,510 companies elected into the patent box corporation tax regime in 2021/22, despite the fact that over 700,000 patents are currently in force in the UK. As has long been the case, the explanation for this low uptake of the regime is assumed to be that many companies are either not aware of the benefits of patent box or believe that it is too complex, or the tax savings are too low to make it worthwhile.
RSM has always made the argument that complexity need not be an insurmountable obstacle, and we have supported many businesses to navigate the patent box calculation process. An issue that we can’t always overcome is that the resulting savings might, in some cases, be lower than initially expected. However, this may now change due to the main corporation tax rate increasing from 19% to 25% from 1 April 2023, meaning the benefit provided by the patent box for the same level of relevant profits has now increased by 66%.
It's patently worthwhile
The patent box regime aims to provide an incentive for companies to both develop and commercialise intellectual property (IP), in the form of patented innovations, here in the UK. It enables companies to apply a lower rate of corporation tax (10%) to profits earned from qualifying patented inventions and equivalent forms of IP.
We expect that the increased tax saving available from April 2023 will increase interest in the regime from those already aware of it and companies’ willingness to work through any perceived complexities. What is less clear is whether the tax rate change will indirectly lead to an increase in awareness of the patent box, but we anticipate that momentum and interest will grow as we move into 2024. In addition, the attractiveness of the research and development (R&D) tax relief for SMEs decreased on 1 April 2023 (due to a reduction in the rate of enhanced corporation tax deduction), and this may further add to the perceived value of the patent box.
Time to (patent) box clever?
To state the obvious, the companies that should be paying attention to patent box are those that are using existing patents or have technologies that could be patented going forward. Relevant patents are UK patents or patents from certain EU member states (some less common categories of IP may also be within scope).
But what should companies with such patents be considering, to determine if patent box tax relief is worth investigating?
- It is important to understand how the patented technology has been developed, who performed the R&D and who the legal owner of the patent is now. Working through these fundamental questions will establish eligibility in a wide range of scenarios.
- To calculate the profit on which a company can apply the reduced tax rate, it is vital to understand how the patented technology is used to ultimately generate profit. Does a single product use a particular patent or patents, or are there many different products using the same or separate patents? In some cases, the relevant profit may arise as a result of the company using patented technology to deliver a service.
With the increase in post-tax value on offer, companies should no longer dismiss the regime due to its perceived complexity, and should seek a clear understanding of whether they would benefit by making a patent box election.
RSM’s innovation reliefs specialists are experienced in helping companies undertake patent box feasibility exercises to explore eligibility and potential tax savings, and supporting the process of preparing and submitting elections.
For more information, please get in touch with Graham Steele, Will Rainford or your usual RSM contact.