The Patent Box: many companies are paying too much tax

Although the uptake in claiming Patent Box relief is still disappointingly low, at just over 1,000, HMRC statistics published today (10 October 2019) show that there continues to be a steady rise in the number of companies claiming Patent Box reliefs.

Patent Box is a tax relief available to profitable companies that have created, or significantly contributed to the creation of, a patented invention. By electing in to the Patent Box companies can take advantage of a 10% corporation tax rate on their patent profits, which compares favourably to the current 19% rate of tax.

HMRC statistics reveal that over the past year the total value from paying a reduced rate of corporation tax stood at £1,035 million.  Of this total, 95% was claimed by companies with turnover of more than £50 million and over half of the companies that claimed were either manufacturers or in the pharmaceutical industry.

The 'Patent Box Gap'

There appears to be a patent box gap, with many eligible companies not making a claim at all. This could be for a number of reasons. 

• Despite the fact that the Patent Box has been around for more than six years ago, many companies are simply not aware that they could benefit from it.
•  For those companies that do know about the Patent Box, the perception is that it is too hard to calculate the relief, due to the fact that there is a minimum seven-step calculation that has to be worked through. Also, in order to do the calculation a company needs to retain detailed records, on a patent by patent basis, of the patent history, the research and development costs prior to the patent application, and attributable patent profits on a patent by patent basis. Businesses would rather not make a claim than risk getting it wrong.

• For those that are tempted to make a claim, many are put off by the fact that there are two separate sets of rules that could apply.These depend on whether the patent was granted before or after July 2016.

At Crowe, we have been helping many of our clients to benefit from the discounted tax rate, but given that there are at least two million active companies in the UK, it seems likely that there are many more not claiming that are paying too much tax unnecessarily.