UK Patent Box: A scheme to enhance tax efficiency for innovative companies

Recently, there have been many changes to the tax incentive schemes designed to reward companies involved in research and development (R&D) activities. However, the Patent Box scheme has been consistently providing UK companies with a reduced 10% corporate tax rate on specific qualifying intellectual property (IP) profits for more than ten years.

With the UK corporation tax rate scaling up to 25% by 1 April 2023, combined with the drastic sweeping changes to the R&D tax credits scheme, many innovative companies are opting to explore the potential benefits of Patent Box to enable continued investment into R&D.

The Patent Box landscape

The UK Patent Box regime reveals a remarkable proposition: a 10% corporation tax rate on profits generated from qualifying patents.

The core objective of this scheme encompasses several key goals, including:

• Fostering the innovation-driven production and sale of pioneering products and services from the UK.
• Increasing patent generation for UK-bred IP, spurring the advancement and commercialisation of both emerging and established patents within the UK.
• Driving the concentration of high-value job opportunities linked to patent development, manufacturing, and utilisation within the UK.

Decoding the qualification criteria

Although the qualifying criteria for the Patent Box scheme can appear confusing on the surface, there are some key points to consider, and working with an experienced adviser will allow you to translate the applicable rules to your companies’ activities.

The outlined conditions essentially create a framework to ensure that only companies with a genuine stake in the development and exploitation of intellectual property can avail themselves of the benefits offered by the Patent Box regime. This helps to prevent misuse of the scheme for purely tax-driven purposes and promote its intended purpose of fostering innovation, development, and economic growth within the UK.

Patent Box trends: tax relief and sector distribution

Statistics published by the Government for Patent Box stated that in tax year 2019 to 2020, a total of 1,395 UK companies claimed Patent Box relief, collectively benefiting from more than £1,220 million in corporate tax relief. Projected figures for tax year 2020 to 2021 total 1,535 claims, indicating a continued growth trend with a 10% increase.

Despite larger-sized companies being the primary recipients of tax relief in both tax years, they constitute less than 30% of the total claimants. In tax year 2019 to 2020, large companies accounted for 95% (£1,159 million) of the total tax relief claimed, comprising only 20% of claimants (390 companies).

The projection for tax year 2020 to 2021 anticipates a similar scenario, where large companies are poised to receive 94% of the relief, while representing slightly under 25% of claimants. Sector-wise, the 'manufacturing' and 'professional, scientific, and technical' sectors dominated in both tax years, receiving 32% and 35% of the total tax relief in tax year 2019 to 2020 and projected to receive 42% and 23% respectively in tax year 2020 to 2021. Moreover, the data reveals that London-based companies consistently secured the largest portion of Patent Box tax relief - 46% in tax year 2019 to 2020 and a projected 50% in 2020 to 2021.

The Patent Box unsealed

The complexity of the Patent Box scheme and the detail involved can be daunting, especially for companies that are not equipped to navigate the intricacies of the scheme. Additionally, the rules and regulations governing the scheme can be quite complex, leading to confusion and frustration for those who attempt to take advantage of it. As a result, many companies are put off by the administrative burden and lack of clarity surrounding the scheme.

Gateley Capitus’ position as part of professional services group, Gateley, allows the team of tax specialists to utilise the skills and expertise of complementary consultancy businesses including Adamson Jones. Adamson Jones is a dedicated patent and trade mark practice specialising in obtaining intellectual property rights for companies and organisations in the UK, Europe and throughout the world. The Gateley Capitus and Adamson Jones partnership allows the teams to provide a specialised end-to-end tailored Patent Box service, meaning that clients can confidently take full advantage of the scheme.