Could more companies (e.g. SMEs in Scotland) be obtaining financial benefit through Patent Box?

The latest set of annual statistics from HM Revenue and Customs (HMRC) show that the number of companies elected into Patent Box marginally increased in the tax year 2022 to 2023 compared with the previous year (to 1,640 from 1,630 companies). This means that the year on year increase in companies from tax year 2013 to 2014 continues, albeit more gradually from tax year 2017 to 2018.  It is also estimated that, in the tax year 2023 to 2024, the number of companies will maintain this trend (i.e. 1,650 companies).  Thus, although the number of companies electing into Patent Box is increasing, it is only by a relatively small number in recent years. 

UK Patent Box enables companies to apply a lower rate of Corporation Tax (10%, as compared with a main rate of 25% from financial year 2023 to 2024 onwards) in the UK to profits earned after 1 April 2013 from qualifying patented inventions and equivalent forms of intellectual property. This is designed to encourage companies to keep and commercialise intellectual property in the UK.  See my previous article for more details.

It is projected that the value of relief claimed under the Patent Box went up from £1,449 million in the tax year 2022 to 2023 to £1,977 million in the tax year 2023 to 2024.  This relatively large increase in value of relief in tax year 2023 to 2024 was driven by the change in the main rate of Corporation Tax from 19% to 25% on 1 April 2023.  In other words, the benefit per claimant surged, but the number of claimants did not. This is important as Patent Box can have a bigger impact on effective tax rates (ETR) for companies in the regime.

As in previous years, large companies are claiming more tax relief on average.  It is estimated that 28% of companies were classified as ‘Large’ and accounted for most of the relief claimed (95%).  Medium and small companies are estimated to make up 28% and 26% respectively of companies claiming relief in tax year 2023-2024 but only account for 5% of the relief claimed.

It will be interesting to see if these trends continue or if more companies, especially SMEs, realise the benefit of claiming Patent Box relief, particularly considering the increased reduction in rate of Corporation Tax. 

The statistics indicate that it is estimated that only 65 companies (4% of total) in Scotland benefited from relief in tax year 2023-2024 and it could be argued that this is a strikingly low figure when set against Scotland’s strong innovation ecosystem.  However, it has to be recognised that the reported region is based on addresses given to HMRC for tax purposes, e.g. a HQ in London, which may not be where the R&D or manufacturing occurs.  So the apparent low Scottish count may be partly a reporting artefact, but it appears to not be entirely due to this. Thus, since Scotland consistently punches above its weight in R&D activity and university‑driven innovation, it appears that there may be a relatively lower Patent Box uptake in this region and there may be opportunities for more Scottish based companies to benefit financially from this tax relief. 

A few questions that these companies could ask themselves is “Can we identify any patentable technologies or processes that have not yet been protected?”, “Do we have (or expect to have) a granted patent or qualifying IP?"  and “Are we generating (or will we soon generate) profits from the patented product/process?”  If the answer to any of these questions is “YES!” then electing into the Patent Box should be considered if it has not already been done. 

It is important to appreciate that, when a closer look is taken at a company’s product development, there is often patentable technologies and processes that they have not yet protected. The bar to obtaining a granted patent is often lower than may be considered by a company who are just carrying out “business as usual”. For example, a small new tweak in a long standing product or process may be patentable, e.g. if it solves a problem or has some advantage and is non-obvious.

For more information on how we can help to protect your Intellectual Property and derive further benefits from doing so, please get in touch.

The number of companies receiving relief varies significantly across UK regions.

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