Reforming a complex tax relief scheme could help unlock benefits for SMEs and stimulate innovation, writes GEMMA MONAGHAN
A complicated tax relief aimed at encouraging companies to commercialise their innovations is in dire need of reform because it favours the few. The Patent Box scheme is said to be beyond the understanding of many businesses which would otherwise benefit from it.
Dating back to 2013, the scheme allows companies to pay a reduced effective rate of corporation tax on relevant profits earned from patented inventions of 10%, compared with the standard 25% rate.
However, government figures for 2023.24 show just 65 companies in Scotland made claims through the scheme, five down on the previous tax year.
The value of relief to 1,650 companies was about £2 billion 95% of that was taken by large companies. Research by TaxWatch found that more than half of the tax break went to just 10 companies, and over a quarter to just one, putting young and small businesses at a disadvantage.
Following international pressure in 2016, changes were made to align the Patent Box regime with global tax standards.
In doing so, calculations were restricted to just one method, which and brought in the “nexus faction”, a formula used to assess the portion of profits eligible for the reduced effective tax rate of 10%, showing that the claimant is involved in genuine innovation. And that’s the point where you lose the interest of many eligible SMEs.
Since 2016, most SMEs, which account for the vast majority of businesses in the UK, find the rules so complicated that they either cannot justify the compliance effort or miss out on relief altogether.
Reforming the Patent Box could help unlock more inclusive growth, making the UK a genuine hub for innovation at every level of business.
Azets would like to see Patent Box made:
- Simpler, with clearer guidance and fewer administrative hurdles so SMEs aren’t deterred from applying for it
- More targeted by focusing on encouraging UK-based R&D, manufacturing and job creation
- With rules that go back to the way they were before the 2016 changes; simply charge an effective 10% corporation tax rate on relevant profits from patented technology, rather than the standard rate of 25%, and remove the nexus fraction
If a business holds patents or invests in new products or processes, now is a good time to review the Patent Box position and prepare for possible changes ahead.
We feel that if a business has gone to the effort of registering a patent, they should get relief on any profits made on that product which contains the patent – it is as simple as that.
Gemma Monaghan is a Patent Box tax specialist and head of R&D tax in Scotland for Azets
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