The UK Spring Budget 2024 built upon the commitment made by the government in its Life Sciences Vision to establish the UK as a leading global hub for life science research and innovation, including through the Life Sciences Innovative Manufacturing Fund supporting investment in high value manufacturing. It was a little surprising for the Budget to pass without further changes to the UK's R&D Tax Credit regime, as tinkering has been so frequent it has become hard to keep up.
The UK has over time implemented several tax measures designed to promote scientific innovation, including the well-established Patent Box tax relief scheme. The Patent Box has remained largely unchanged since its transition to a OECD/EU compliant 'modified nexus’ system.
The Patent Box regime enables companies to apply a lower rate (10%) of corporation tax to certain profits from qualifying patented inventions, thereby encouraging companies to keep and commercialise IP in the UK. A company can use Patent Box if it makes UK taxable profits from exploiting patented inventions, owns or has exclusively licensed-in UK, EPO or EEA patents, and has undertaken qualifying development on the relevant patents. To qualify, the company must have made a significant contribution to either (i) the creation or development of the invention or (ii) a product incorporating the invention.
As the delta between the Patent Box rate (10%) and the UK corporation tax rate (25%) is substantial, the regime can provide significant benefits for some tax payers. In 2021-2022, the Government reported that the Patent Box scheme saved UK businesses a record £1.4 billion. However, the scheme has a number of issues that could be improved and remain unaddressed following the Budget and some companies, particularly those with limited resources, may be discouraged from utilising the scheme:
Less valuable for smaller and early stage companies
Despite the eye-catching Patent Box rate of 10%, many innovative companies, especially in the life sciences and healthcare sector, will be heavily loss-making for several years and derive no tax saving from patent box during that time. The UK R&D tax credit regime can provide more immediate benefits for early-stage innovative growth companies. Planning for future Patent Box eligibility is rarely high on an R&D-intensive company's agenda.
Narrow scope
The regime is limited to patented inventions and a few other limited rights. This narrow scope can hinder the scheme's effectiveness. Companies may, for commercial reasons, maintain the secrecy of their technology, allowing them to exploit it exclusively for an indefinite period rather than registering a patent and thereby exposing the invention to competitors. Such companies are unable to benefit from the regime.
Complexity and administrative burden
The regime involves complex rules and a significant administrative burden to meet the reporting requirements and documentation obligations. The regime disproportionately benefits larger companies with greater resources - over 94% of the relief has been claimed by large corporations. The top 275 companies, ranked by the value of relief claimed annually, represent over 97% of the total relief obtained.
IP losses offset
In the early stages of IP development, companies will frequently not make a profit and build up tax losses. Once a company elects into the regime, any Patent Box losses that have arisen must be offset against Patent Box profits. This can reduce the benefit of the scheme if it is elected into too early.
The Budget didn’t offer much beyond the previous commitments made in the Autumn Statement, with the Government focusing on more headline-grabbing changes for the election year. However, if the UK wants to continue to promote innovation, then revisiting the Patent Box regime would be a worthwhile exercise.
