Wednesday, 5 October 2016

Patent Box: why so few take-ups?

A recent feature on the website of Startups ("The UK's No.1 service for starting a business") carried the alarming title "Small businesses not taking advantage of Patent Box relief", its theme being that, in 2013-4, the first year for which statistics have become available, only 700 claims for Patent Box tax relief were made by small and medium-sized businesses.

In percentage terms this adds up to just 4.6% of potential relief claims were lodged between 2013 and 2014 – the first year of statistics available.  According to this post:
" ... Patent Box expert Kari Campbell has revealed that only 700 claims made between 2013 and 2014 – the first year of available statistics – compared to over 10,000 claims made for research and development tax relief over the same period.

Surprisingly, firms from many sectors usually characterised as innovative such as the information & communication, financial & insurance and real estate (25) and the professional, scientific & technical (65) made only a small number of claims. Despite this, both sectors have high amounts of relief per claim at an average of £2.34m and £332,000 respectively.

Introduced to increase the development and level of patenting of intellectual property in the UK, businesses can pay a rate of corporation tax on any patent box profits earned after 1 April 2013 lower than the current 20% main rate.

Campbell commented: 
“Smaller businesses are often put off claiming tax relief available to them, particularly the Patent Box, due to the complexities of making the first claim and fears of getting it wrong. However, it should be emphasised that, despite recent negative press, the Patent Box is a government backed scheme designed to benefit those businesses within Britain who are making the effort to innovate products within the UK.”
While Campbell is right to point out that complexity is a deterrent factor when it comes to making Patent Box relief claims, there are a number of other reasons why the 4.6% figure is as low as it is, and they need not raise too much cause for alarm.

For one thing, not all R&D leads to the grant of a patent at all, let alone a profit-generating one. This is especially so in the relatively restrictive legal regime that governs the grant of patents for business methods, information presentation and computer software in Europe. This may help to account for the discrepancy between the number of Patent Box claims and those made for research and development tax relief.

To the complexity of the scheme we can add the factor that some patent owners may have been advised not to apply on the basis that they would not be eligible for it under the criteria for relief provision.

There was also quite a bit of uncertainty about the ambit of the UK Patent Box scheme as initially designed, since its legitimacy was challenged under EU rules. This too may have had a dampening influence on claims made during the period 2013-4.

However, the main culprit may well be a combination of ignorance of the provisions together with the low priority given to intellectual property issues in the first place,

It is good that the low level of applications has been flagged. Let's hope that, by reducing the level of complexity of the Patent Box and by raising awareness of its availability, this state of affairs can be changed.

1 comment:

  1. Let's say your profit overall is a nice round £1M. Corporation tax at 20% would be 200k. If *all* of the profit is attributable to one or more patents, you might therefore save £100k by reducing this to 10%. However, in the real world, except perhaps for patents on chemical entities, only a fraction could realistically be attributed to a patent. Arms-length licensing calculations usually come up with figures of a few percent, so the actual contribution to the profit might be around 10% (being very generous) for a typical product (which will have lots of components, not all of them covered by a patent). This reduces the profit that might be considered to £100k, and the resulting saving to about £10k. This would be just about justifiable, given the costs in getting an accountant to figure it out, and possibly also getting some advice from a patent attorney. Anything much below £1M though is progressively more difficult to justify. My conclusion therefore is that patent box is only really useful for large pharma companies, which can attribute large profits solely to their patents. For smaller companies other options like R&D tax credits are much more valuable and easy to get. With corporation tax being reduced anyway, the benefits become even smaller.