Businesses save record amount of corporation tax through Patent Box scheme: £1.4 billion in relief in just a year

Published March 5, 2024

Relief could be made more generous to encourage innovation
UK companies spending on R&D still lags behind the United States, Germany, and Japan

The amount of tax saved by businesses through HMRC’s Patent Box scheme has increased by 23% over the last five years, from £1.14 billion in 2017/18 to £1.4 billion in 2021/22, says the leading intellectual property firm Mathys & Squire.

The Patent Box, introduced in 2013, is a tax incentive that allows UK businesses to pay just 10% corporation tax on profits derived from any patents covering the UK or some EU states. It was introduced by the Government to encourage businesses to invest more in Research and Development (R&D).

With Corporation Tax now at 25% that tax break has become increasingly attractive.

Max Thoma, Partner at Mathys & Squire says that making the Patent Box relief more generous would act as an incentive for domestic firms to invest more in R&D. This may be possible now that the UK is no longer a member of the European Union and bound by its state aid restrictions.

The Patent Box tax relief is seen as one way to help improve the UK’s low level of R&D spend. Overall spending on Research and Development (R&D) in the UK is estimated to be 2.9% of GDP*. This trails behind countries such as the US (3.47% of GDP), Japan (3.27%) and Germany (3.13%).

Says Max Thoma: “The Patent Box rules have had a positive effect on the amount British businesses invest in R&D. However, we still lag behind some of our global competitors – an even better Patent Box would help to close that gap.”

Additionally, the UK lags significantly behind other G7 countries in terms of the total number of patent applications. In 2022, applications to the UK Intellectual Property Office (UKIPO) reached 19,500**- however this is dwarfed by the number of patents filed by applicants based in China (1.58 million), the United States (505,000) and Japan (405,400)***.

Despite the rising amount of relief being provided through the Patent Box system, the number of companies claiming relief has fallen from 1,540 in 2017/18 to 1,510 in 2021/22. Mathys & Squire point out that this could be a sign that the Patent Box scheme is much less well known than R&D credits (which can be used in combination with the Patent Box scheme).

Sectors including construction (1% of Patent Box claims) and IT (4% of claims) make very limited use of the Patent Box scheme, suggesting that businesses in these sectors are missing out on opportunities to both protect their intellectual property and reduce their corporation tax bills.

Says Max Thoma: “A significant number of companies may not be aware of the benefits of the Patent Box or that they could be claiming a significant tax relief.”

“Construction and IT are both sectors where businesses are not always aware that they may be able to patent systems and techniques they have developed. Some are paying too much tax as a result.”

Change in number of companies claiming Patent Box relief and amount of relief claimed (in £m)

Change in number of companies claiming Patent Box relief and amount of relief claimed (in £m)