7 August 2019

Patent box – opportunities for tax relief missed

Although headlines suggest the British government wants to promote innovation across the whole nation, including research and development the Government’s own data suggests UK patent box tax relief is benefiting large companies disproportionately in the UK, and failing to benefit companies in the regions.

In the 2017 budget Chancellor Philip Hammond said: “Britain is genuinely at the forefront of a technological revolution…not just in our universities and research institutes, but in the commercial development labs of our great companies.”

 

London-centric benefit

 

But the data suggests government tax reliefs are being predominantly enjoyed by one region; London and the south-east, and only by big business. This is both surprising and disappointing as the relief is available to medium, small and micro companies as well, regardless of where they are based.

UK patent box relief was introduced with effect from 1 April 2013, amended in accordance with OECD recommendations with effect from 1 July 2016. The relief has only ever been available to companies, offering a corporation tax relief with the effect of reducing corporation tax to 10% on patents royalties and embedded income relating to patents, as compared to the main rate of corporation tax, currently 19%.

 

How patent box applies – truth versus urban myth

 

At odds with the headlines, relief is given by deductions from taxable profits, requiring complex calculations, and a patent box tax rate of 10% does not exist, arguably to reduce potential problems with some UK tax treaties.

The scheme enables companies to secure relief from their patented inventions and equivalent forms of intellectual property. However:

• calculations are not easy, involving multiple stages in any computation
• relief does not apply to income until a patent has been granted, after which a claim can be made for the relief for six years prior to the grant of the patents, given as a relief in the year the patented is granted
• relief is not automatic
• companies must notify HMRC they wish to claim the relief within two years (of the first accounting period for which the relevant profits and income arise), or they lose the right to claim relief
• such choices, or elections, continue to apply until revoked and after that a company can’t re-elect into patent box for six years
• elections apply to all the trades of the company, yet each company in a group must make its own election, and an election by a corporate partner in a partnership only applies to its own interests.

 

Limited take-up in regions

 

Given the two year time lag for making applications, data for patent box take-up is necessarily always a couple of years behind, but the data is concerning, suggesting real lack of equality across the UK. The government’s own take-up statistics reveal, for example:

• In 2015/16, only 1,160 companies across the UK claim to relief under the patent box scheme, with fewer (1,025) in 2016/17
• whilst about a quarter of the companies claiming patent box relief were classified as large, those same large companies accounted for the majority of the relief claimed
• manufacturing companies claimed the highest value of relief (37% in 2016/17)
• companies in professional scientific and technical activities lagged far behind, at about 15%
• 72% of relief was claimed by in 2016/17 by companies in London and the south east
• companies in the north-east lodged only about 2% of the total number of applications and the relief they got was too small to register in the statistics.

In summary, big companies in manufacturing based in London and the south-east seem to be most aware of, and enjoying the benefit of this relief.

It would be very positive if government statistics in 12 months’ time showed a very different picture, with companies in much a greater range of sectors successfully receiving this important tax relief to support innovation all over the UK.

 

Act now to benefit from your innovation

 

Patent box creates real opportunities for all innovative companies across the UK if only they know about it, are able to navigate the complexities of the associated calculations, get access to expert advice they need, and make effective applications for the relief.

The benefits of claiming patent box are potentially very significant and we would be glad to advise any company about the opportunities it potentially offers. Please contact Sarah Woodall on 07384 118 426 or at swoodall@hcrlaw.com if you would like help.

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About the Author
Sarah Woodall, Head of Tax, Partner (Barrister)

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