UK Patent Box ‘not providing effective incentive’ to life sciences SMEs

Out-Law News | 06 Oct 2021 | 3:34 pm | 2 min. read

The lack of take-up of the UK’s ‘patent box’ by small and medium sized companies (SMEs) suggests that the beneficial tax regime is not effectively incentivising innovation by that group of businesses, a tax expert has said.

Only 5% of tax relief claims under the UK’s Patent Box were made by small and medium sized companies (SMEs) according to the latest estimates published by the Office of National Statistics (ONS). Statistics for 2018-2019 reveal that 92% of relief claimed under the Patent Box regime was by companies classified as “large”, whilst only 1% was by “small” companies and a further 4% by “medium” sized companies. Although the figure for claims by large companies is projected to remain unchanged for 2019-2020, a further drop of 1% is anticipated for the value of relief claimed by SMEs.

Penny Simmons of Pinsent Masons, the law firm behind Out-Law, said: “These statistics provide further evidence of the need to review the tax reliefs and incentives available to start-ups looking to innovate and invest in R&D and then go on to develop and manufacture those innovations”.

Simmons Penny

Penny Simmons

Legal Director

The figures show that the patent box is not providing an effective incentive to encourage the development of IP innovation amongst SMEs across the UK life sciences sector and beyond

“The two main tax relief schemes available to encourage and incentivise UK innovation are widely accepted as being the R&D tax credits system and the patent box. Start-ups are often the driving force behind innovation. It is vital that the government creates and maintains tax reliefs that effectively target the businesses and sectors that it wants to incentivise. A key focus for the government is encouraging innovation and incentivising R&D investment, particularly in sectors such as life sciences. Notably, in the life sciences sector, which invests more in R&D than any other UK sector, 82% of current UK life sciences businesses are categorised as SMEs. These ONS figures show that the patent box is not providing an effective incentive to encourage the development of IP innovation amongst SMEs across the UK life sciences sector and beyond,” she said.

The UK’s elective patent box regime offers a reduced 10% tax rate on profits earned from certain patents and other intellectual property rights. Profits from manufacturing and selling patents and IP may be included, although profits derived from a company's routine manufacturing or development functions are specifically excluded. Increasing the level of patenting of UK developed IP and ensuring that new and existing patents are developed in, manufactured and sold from the UK are stated objectives of the patent box.

The latest ONS figures show that the value of relief claimed under the patent box has continued to increase, with a total of £1,129 million claimed for 2018-2019. However, the rate of increase has slowed. As with previous years, over 50% of companies claiming relief were in the manufacturing sector, which includes pharmaceuticals, representing 32% of the total relief claimed.

The low value of patent box claims by SMEs directly contrasts with the increasing number of R&D tax credits claims by SMEs. According to the most recent ONS statistics, the estimated number of R&D tax credits claims increased by 16% during the year ending March 2020, primarily driven by a 16% increase in the number of SME R&D claims.

“The under-use of the patent box by SMEs provides yet more evidence that when reviewing the R&D tax reliefs system, the government needs to prioritise and safeguard the availability and effectiveness of reliefs for SMEs,” said Simmons.

The government is currently reviewing the R&D tax relief system to ensure that the UK “remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted”. Details of the wide-ranging review are contained in a consultation paper that was published in March. Broadly, the scope of the review is to consider whether to expand the definition of R&D; continue to maintain two separate relief systems for larger and smaller businesses; introduce changes to how the system is administered; and introduce territoriality requirements to make the reliefs more targeted.