The UK Patent Box was introduced in the 2013/14 tax year with the intention of incentivising companies to:
- Increase the level of patenting of intellectual property (IP) developed in the UK, and ensure that new and existing patents are further developed and commercialised in the UK;
- Manufacture and sell those innovative products and services from the UK; and
- Encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK.
The incentive is in the form of a lower rate (10%) of Corporation Tax to profits attributable to patents and equivalent IP. The benefit still is being phased in, with the full benefit available from the 2017/18 tax year onwards.
Companies wishing to claim tax relief under the Patent Box must do so within two-years of the end of the accounting period in which the profits and income arise. This two-year lag means that it is only recently that the full set of data for the first year of the Patent Box has become available. This data has just been released by HMRC - https://www.gov.uk/government/statistics/patent-box-reliefs-statistics
Some of the key-points arising from that analysis of the first year of the Patent Box are:-
- 700 companies claimed tax relief under the Patent Box with a total value just under £350m.
- A third of the companies claiming were large (> £50m turnover / >250 employees), and together they accounted for 95% of the relief.
- The average relief was £1.45m for a large company, and £67k for a medium sized company (£10-50m turnover / 50-250 employees).
- Perhaps unsurprisingly most companies were in the Manufacturing sector (64%). The Wholesale & Retail and Transport sector took second place (16%).
- The value of the relief claimed varied across the UK, with companies in London claiming 57% of the total relief. This statistic must, however, be treated with some caution given that location is determined by the location notified for tax purposes, which typically will be the headquarters location, and as a generality London will tend to be the headquarters location of larger companies.
The Government has recently made changes to the Patent Box to comply with a new international framework for preferential tax regimes for IP set out by the Organisation for Economic Co-operation and Development (OECD). This means that the amount of profit from an IP asset which can qualify for the reduced 10% rate of Corporation Tax will depend on the proportion of the asset’s development expenditure incurred by the company.
R&D Tax Credits
Also recently released are HMRC's statistics relating to R&D tax credits. The tax relief available under R&D tax credits dwarfs the Patent Box relief: R&D tax credits rose to £2.45bn in 2014-15, an increase of £675m (38%) from the previous year.
R&D tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation. They work by reducing a company's tax bill by an amount equal to a percentage of the company’s allowable R&D expenditure. There are three schemes for claiming relief: The Small or Medium-sized Enterprise (SME) Scheme; The Large Company Scheme; and Research and Development Expenditure Credits. An SME may claim a higher rate of relief than a large company, and an SME which has no tax bill to reduce may claim a cash payment instead.
It would appear from the report that the Patent Box got off to a good start, benefitting innovative companies to the tune of £350m in its first year. However, the relief claimed is a long way behind R&D tax credit relief. What the statistics do not show is the extent to which the Patent Box meets the three objectives set out above and no doubt that will be the subject of further academic analysis and debate. However, based on these first year statistics, it will be interesting to see whether the Patent Box will be effective in stemming the post-Brexit expected relocation abroad of the high-value jobs associated with the development, manufacture and exploitation of patents.
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