Companies save £1.4bn via UK patent box scheme
Government urged to make relief more generous to encourage innovation | UK companies’ R&D spend lags behind US, Germany and Japan.
The amount of tax saved by businesses through the HMRC’s ‘patent box’ scheme has jumped by 23% over the last five years—from £1.14 billion ($1.45 billion) in 2017/18 to £1.4 billion in 2021/22—according to new research by Mathys & Squire.
The scheme, introduced in 2013, is a tax incentive that allows UK businesses to pay just 10% corporation tax on profits derived from any patents covering the UK or some EU states. Its aim is to encourage businesses to invest more in research and development (R&D).
This tax relief is seen as one way to help improve the UK’s low level of R&D spend. Overall spending on research and development (R&D) in the UK is estimated to be 2.9% of GDP, according to Mathys & Squire. This trails behind countries such as the US (3.47% of GDP), Japan (3.27%) and Germany (3.13%).
Lagging behind
Additionally, the UK lags significantly behind other G7 countries in terms of the total number of patent applications. In 2022, applications to the UK Intellectual Property Office (UKIPO) reached 19,500. However, this is dwarfed by the number of patents filed by applicants based in China (1.58 million), the US (505,000) and Japan (405,400).
The firm noted that with corporation tax now at 25%, this tax break should become increasingly attractive to many.
If the patent box relief were to become more generous, it added, there would be a considerable incentive for domestic firms to invest more in R&D.
The report further suggested that this option has become even more feasible now that the UK is no longer a member of the European Union or bound by its state aid restrictions.
Commenting on these advantages, Max Thoma, partner at Mathys & Squire, said: “The patent box rules have had a positive effect on the amount British businesses invest in R&D.
“However, we still lag behind some of our global competitors—an even better patent box would help to close that gap.”
Construction and IT ‘unaware’ of scheme
Despite the rising amount of relief being provided through the patent box system, the number of companies claiming relief has fallen from 1,540 in 2017/18 to 1,510 in 2021/22.
Mathys & Squire point out that this could be a sign that the scheme is much less well known than R&D credits (which can be used in combination with the relief).
Sectors including construction, which make up just 1% of patent box claims, and IT, which comprise 4% of claims, make very limited use of the scheme, according to Mathys & Squire.
This means, it added, that businesses in these sectors are missing out on opportunities to both protect their IP and reduce their corporation tax bills.
Thoma said: “A significant number of companies may not be aware of the benefits of the patent box or that they could be claiming significant tax relief.”
“Construction and IT are both sectors where businesses are not always aware that they may be able to patent systems and techniques they have developed. Some are paying too much tax as a result.”
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