Since July 2021, a new rule has been introduced to the Patent Box scheme specifying that companies must show a direct connection between the research and development (R&D) activities that led to their qualifying patents. Yet in the 2022-23 tax year, 65,000 companies made an R&D tax relief claim compared to only 1,600 companies claiming Patent Box, despite over 22,000 patents being granted during the same period.
So, why is there such a huge divide between the number of companies claiming R&D tax relief and those claiming Patent Box? There are six main factors that could explain this.
1. Focusing on the upfront cost, rather than the potential benefits.
Not all patents are created equal, and the complexity of your invention can greatly influence the overall cost. Because of this, fees can vary anywhere from £350 to beyond £10,000 for initial filing, examination, and search costs. For a more detailed breakdown, see our article: How Much Does a Patent Cost in the UK?
It is important to understand the costs associated with patenting in the UK and weighing these against the benefits of the Patent Box scheme. Profits from patents are taxed at an effective rate of 10% compared to the standard UK corporation tax rate of 25%, resulting in a tax saving of up to 15% every year qualifying profits are generated from patents. By planning ahead, leveraging professional expertise, and considering all aspects of the patenting process, you can make informed decisions that support the long-term success of your business.
2. Uncertainty regarding the workings of the scheme.
To be eligible for Patent Box, your company must own or exclusively licence a patented product or process and must actively be involved in its development. The scheme applies to specific profits directly attributable to the patented innovation; not all income will benefit from the reduced tax rate. It can be complex to calculate this, but the benefits can be substantial, and a qualified Patent Box advisor will be able to help you understand your potential tax savings.
3. Misconception that patents are solely about protection.
Many companies are under the impression they will not require a patent for their innovations if they do not plan on suing competitors. While this is a great method of protecting intellectual property (IP), patents can also provide significant value through factors such as competitive advantage, revenue generation and brand perception.
Owning patented products or processes creates eligibility to the Patent Box scheme, which can enable your company to pay a reduced rate of 10% Corporation Tax. To find out more, see our article: Understanding the UK Patent Box Scheme.
4. Lack of awareness for what can be patented, and the Patent Box scheme in general.
Similar to the R&D tax relief scheme, clients often underestimate what they achieve every day. For patent eligibility, you must have IP which is novel, inventive and capable of industrial application. Constantly reviewing your patent process can uncover areas which you may not have initially realised are eligible for the scheme. Believing the process to create a patent is time-consuming and complex.
The process of applying for a patent typically involves checking your invention has not already been patented or disclosed, preparing a detailed description of your invention and supplying any necessary drawings or documentation to support your claim. You must also submit your application to the Intellectual Property Office (IPO), paying fees for a search by the IPO and a substantive examination to determine if your invention merits a patent, and waiting for grant or refusal of the claim.
This application process can be streamlined by utilising a qualified patent attorney, who can leverage their expertise to prepare and file the application on your behalf, help you to avoid costly mistakes, and ensuring your patent is robust enough to withstand challenges. This process can typically take between 2-4 years, but profits earned while a patent is pending can be claimed up to six years prior to the patent being granted.
5. Lack of guidance from professional advisors.
As patent applications must demonstrate a direct connection between the research and development (R&D) activities that led to their innovations, claiming R&D tax relief is a good indicator of a company’s potential for a Patent Box claim. Advisors should have the specialist knowledge required to assess and identify Patent Box eligibility and open discussions with their clients to spread awareness of this scheme.
While thousands of UK companies are capitalising on R&D tax relief, only a small fraction are accessing the additional, and often substantial, benefits of the Patent Box scheme. With the right guidance and a clear understanding of Patent Box, many businesses may find they’re far closer to qualifying than they realise. Find out more about our Patent Box service or get in touch today to speak to one of our expert advisors.
