The patent box office bomb – why aren’t more companies benefitting from a 10% tax rate?

In recent years, over 1,500 UK companies have accessed the government’s patent box tax regime, which aims to provide incentives for companies to both develop and commercialise intellectual property (IP), in the form of patented innovations in the UK.

The relief enables companies to apply a lower rate of corporation tax (10%) to profits earned from qualifying patented inventions and equivalent forms of intellectual property. The total value of relief claimed under the patent box regime increased slightly in the 2021/22 tax year, from £1,196m to £1,363m. However, the number of companies accessing this relief fell from 1,610 to 1,510, making 2021/22 the first tax year that participation in the patent box regime declined.

Does this decline in the popularity of patent box indicate a wider trend in UK innovation? Official statistics from the UK Intellectual Property Office (IPO) show that the number of new patent applications fell post-pandemic. However, the number of patents granted by the IPO in 2021 and 2022 (correlating broadly with the 2021/22 tax year) were at record levels, mostly due to an IPO initiative to reduce the backlog of outstanding applications. This drop in new applications could indicate that UK innovation is waning, but because companies can only elect into the patent box regime once a patent is granted, this suggests that there are other reasons or barriers impacting take-up of the incentive itself.

Historically, take-up of the patent box tax regime has been disappointing. Perceived complexities in the necessary calculations and the difficulty forecasting post-tax cash savings has often meant companies tend to place it in the ‘too hard’ basket or de-prioritise the regime over other areas of business.

These issues may have been exacerbated by recent changes such as mandatory streaming of different profit sources and introduction of the sometimes problematic ‘R&D fraction’. However, the higher level of relief being claimed overall suggests that these issues can be overcome. The underlying profitability, the key factor in determining the level of relief obtained, of claimant companies has increased, improving the value of the relief. In addition, higher corporation tax receipts in the overall economy would suggest that the level of tax saved through patent box relief should be expected to increase.

Another historic accusation levelled at the patent box tax regime is that it disproportionately benefits larger companies. The facts certainly support this, as 94% of the relief (over £1bn) is claimed by large companies (broadly, those with over 250 employees). In fact, the top 275 companies (by the value of relief claimed each year) account for more than 97% of the total relief given. Clearly small and medium sized enterprises (SMEs) have not been taking up this tax incentive in their droves.

What needs to change? In our view, SMEs should not be put off by the perceived complexities of the patent box regime. Often claims can be relatively straight-forward and easy to compute, and the benefits can sometimes be significant. Once elected into the regime, benefits flow every year in which an eligible company remains elected in or continues to exploit its patented inventions, so a longer-term view should be taken rather than a short-term focus on cost or expected effort.

The increase in corporation tax rate from 1 April 2023 also represents a boon for patent box claimants, as the value of relief has effectively increased by two-thirds as the difference between the patent box rate of 10% and the main corporation tax rate of 25% has widened.

Patent box should be considered an accessible and established tax regime. Rather than a decline in participation, we would hope that the increase in the value of relief from April 2023 prompts all eligible companies to look again at taking advantage of this relief.