R&D Tax Credit statistics released by HMRC this week show £3.5 billion has been claimed by 40,000 UK businesses this year, beating last year’s record and set to increase further. £1.8 billion has been paid in cash to loss making companies. This is a positive result following the government’s push to raise awareness of innovation funding, as well as their increased investment in innovation announced by the Chancellor in the Autumn Budget.
In contrast, businesses are not taking advantage of the significant opportunity presented by the governments Patent Box initiative. HMRC’s latest figures show that only around 1,000 companies claimed tax relief available from the Patent Box regime, which equates to just 3% of the R&D tax credit claim volume. Only 4% of the £942 million Patent Box benefit claimed went to SMEs, whilst 48% of the total relief was awarded to manufacturing companies. Clearly there is a huge untapped opportunity here.
The Patent Box regime enables businesses to claim a lower rate of 10% Corporation Tax against profits earned from their patented inventions and equivalent forms of intellectual property, delivering a significant amount back to businesses, in a similar way to R&D tax credits.
With the average Patent Box claim value for SMEs sitting at £55,000, the reward is sizeable, which begs the question: why are so many SMEs missing out on this funding? Looking at how the scheme has changed since its introduction offers some explanation; the relief has been phased in since its launch in 2013, with the full benefit of the scheme made available in April 2017. So, awareness levels of the scheme may be low.
Secondly, there must be a clear engineering rationale demonstrating how the patented item being used is critical to the performance of the product. If any other non-patented item could be substituted then a claim is not valid. There must also be a significant contribution to the development of the patented invention or product. Most companies are unsure how to satisfy HMRC’s requirements in this respect.
Finally, the calculation involved in Patent Box is incredibly complex, requiring specialist knowledge to compile a claim. The very term ‘nexus fraction’ puts many businesses and accountants off the whole process. MPA Group Senior Tax Specialist, Lisa Baum, commented:
Whilst we’re pleased to see the number of Patent Box claims increase year on year, it is concerning that this relief is clearly underused compared to the R&D Tax Credit scheme. The government is making UK innovation a priority this year, providing more investment in this area than ever before, but it seems businesses still aren’t aware of the opportunity presented by Patent Box. Positioned alongside HMRC’s R&D Tax Credit scheme, Patent Box is another example of where companies can seek support and encouragement to take risks in order to progress and grow.
The funds they receive are often re-invested back into the organisation in order to ensure innovation and R&D continues and this, ultimately, benefits the overall UK economy. Critically, companies should remember that both Patent Box and R&D Tax Credits can be used together, which can deliver significantly more than when using a single tax relief exclusively.Lisa Baum, Senior Tax Specialist, MPA Group
As the eligibility criteria for Patent Box is a point of confusion for many business owners and accountants, we’ve addressed a number of the FAQs businesses have around the regime. For advice tailored to your business, our team of experts are on hand to work alongside you to identify any qualifying intellectual property.
Take a look at the full HMRC Patent Box Statistics report here.