18 May 2017

Patent Box scheme saving businesses record amount in corporation tax

The Patent Box scheme is currently saving businesses a record amount in corporation tax, with Brexit providing an opportunity for even further tax breaks.

The amount saved by businesses through the Patent Box tax break increased 17% last year to a record high of £875m* (up from £750m the year before), with Brexit providing an opportunity to make the tax break even more effective.

The Patent Box, introduced in 2013, allows UK businesses to pay just 10% corporation tax on profits derived from any UK (and certain EU) patents. It was introduced by the Government to encourage businesses to invest more in research and development (R&D).

Despite the popularity of the scheme, in July 2016, the EU forced the Government to make changes which made it more bureaucratic and therefore less attractive. This followed an objection from some EU member states that the tax break did not comply with its state aid rules because it gave some companies an unfair advantage.

Brexit may now provide an opportunity for the Government to reform the Patent Box without restrictions from the EU and its ‘state aid’ rules. It also provides an ideal opportunity to introduce other Patent Box style tax breaks to further incentivise UK businesses to invest in R&D.

This sort of proactive action may help protect the UK as one of the leading centres of innovation once it has left the EU – creating additional jobs in R&D and improving UK productivity.

Businesses in the UK currently invest the equivalent of 1.7%** of GDP on R&D, two-fifths less than the OECD average.

Kirsty Murray, director and head of our technology and life sciences group, says: “Brexit represents a real opportunity for the UK to give R&D investment a shot in the arm by a sensible stepping up of tax breaks. Tax breaks in areas like R&D should then be able to feed through to a higher overall tax take from improved corporate profits and a higher corporation tax take.

“A more attractive Patent Box tax break will also encourage more European companies to shift R&D jobs to the UK post-Brexit, thereby increasing employment within the UK and consequent tax receipts through PAYE and NIC.

“To make the Patent Box more efficient in driving innovation, the Government could simplify the application process and reduce the requirements to qualify, as well as introduce other incentives to help businesses compete internationally, such as the increased administrative requirements that were introduced on the back of the recent changes.

“There were promising signs in the Spring Budget that the Government intends to make administrative changes to the R&D tax scheme. Hopefully this will be extended to the Patent Box too.

“For now, the Patent Box in its current form is here to stay. The good news is that, despite its shortfalls, businesses can make significant savings through the scheme.”

The amount saved by businesses through the Patent Box scheme: 

*Source: HMRC

**Source: OECD

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