The announcement by the Chancellor during the Spring Statement that HM Treasury wants to strengthen the tax system, so firms have better conditions to invest, and grow is welcomed. UK tech businesses have a strong desire to invest more in capital, R&D and people.
owever, ensuring these intentions materialise will require getting the right incentive structure to drive investment into the UK tech sector.
Patent Box
One of the areas that should be under review is the UK Patent Box scheme. The scheme is a valuable part of the UK’s innovation incentives by encouraging companies to extract value from their IP by marketing a new product production method, or service, that they have patented. This brings tangible benefits to the UK and the wider economy and the UK’s PB is the only R&D scheme that currently incentivises this activity.
In tax year 2018 to 2019, 1,405 companies claimed relief under the Patent Box (Govt stats), and the total value of relief claimed was £1,129 million. In tax year 2019 to 2020, it is expected that in total 1,370 companies will claim relief for the tax year 2019 to 2020, with the total value of claims likely to be £1,175 million. This is the first small decline.
Over the period since its introduction the value of relief has increased as the rate has been phased in.
Of the companies that claimed this relief in tax year 2018 to 2019, 28% were classified as ‘Large’, but these companies accounted for most of the relief claimed (92%). One of the deterrents to SMEs is the perceived effort required to track profit derived from qualifying IP (in management time and cost).
Over half (755) of the companies that claimed in tax year 2018 to 2019 were in the Manufacturing sector (including Pharmaceuticals), accounting for 32% of the relief.
Software fit
However, given the changes in how companies innovate since the patent box was introduced in 2013, reforms to the Patent Box could make it more suited to modern software and data-based R&D that relies increasingly on iterative innovation rather than patents. Changes to improve the patent box could include the inclusion of a wider range of IP rights (as is done in the Dutch Innovation Box), including software, copyright materials and inventions that may not be patentable.
Reviewing this scheme could increase the uptake among SMEs, tech start-ups and scale-ups who would be more likely to benefit from these wider range of IP rights. Furthermore, exploring ways to improve the governance of Patent Box – including promoting it, monitoring, and managing administrative burdens – would help ensure the scheme continues to play a key role within the UK’s structure for R&D incentives.
Our experience is that whilst there is effort in the first year of a patent box claim, with appropriate planning of the design of processes and methodologies, subsequent year claims should be less complex. We believe that all companies that undertake R&D should actively consider how they can benefit from the patent box as well as R&D tax credits.
