13 October 2020
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Patent Box legislation has been very much in vogue over the last few years. At their heart, such schemes provide tax incentives to companies selling patented products. But there are questions around whether the Patent Box is achieving its lofty goals. Matthew Smith discusses in an article originally published in WIPR.

The aims of the Patent Box are to encourage innovation by existing companies and, to an extent, to influence a company's decision about where its innovation work should be carried out.

The UK edition of the Patent Box began in 2013, offering a significantly reduced rate of corporation tax payable on profits derived from patented technologies. After a few years of phasing in, companies taking part were able to access a rate of 10%, a significantly lower rate than the usual 20% (2013-17) or 19% (2017-present).

The UK's HM Revenue and Customs released the latest figures about Patent Box usage and uptake last month, which cover the financial year 2017-18. The 'lag' in figures is due to the fact that Patent Box tax benefits can be claimed up to two years after the relevant accounting period. So, for example, it will not be certain what the figures for 2020-21 are until April 2023.

Where are we now?

The latest figures paint a fairly rosy picture of Patent Box usage. The financial year 2017-18 saw the highest number of companies claiming relief (around 1,300) and the highest value of relief claimed (around £1.1 billion). Data for 2018-19 so far indicates that it is likely to set new records.

The figures show an encouraging uptake across different sizes of companies: the number of micro, small, medium and large-sized entities claiming Patent Box relief were each in the range of 260 to 360. We do not know how many companies there are in total (so no percentage can be estimated).

The proportion of companies claiming relief correlates to company size: the number of large companies claiming is the highest, the number of micro companies, the lowest.

However, when you dig a little deeper into the statistics some large disparities emerge.

Most of the companies claiming relief (around 75%) are in manufacturing or wholesale/retail which is not surprising: these are sectors where patented products might be most easily identified, and profits stemming from them most easily quantified.

What is perhaps more surprising is that when the value of relief claimed is considered, it is dominated (34%) by companies in the financial and insurance sector. Not only were there only ten such companies claiming relief (so an average of about £37 million per company of relief claimed), this sector is not traditionally known as a big patent filer.

It would be interesting to study which patents are being relied on here, and how the companies are attributing profit to the inventions claimed.

It might be that companies in this sector have more knowledge of the UK taxation system, allowing them to unleash the full potential of the Patent Box to their advantage. Perhaps by improving such understanding in other fields, a similar level of uptake can be achieved.

Another disparity is that large corporations claimed by far the majority (92%) of the relief by value. Large companies will, of course, have bigger profits on which to pay corporation tax, and potentially more patents with which to cover their innovations.

This has a possible knock-on effect which leads to the big geographical variation in value of relief claimed: nearly 50% is claimed by companies based in London. Since London is a popular home for large companies, perhaps the two factors are linked.

Even looking at the raw number of companies claiming relief, geographical factors are at play. Within England there is a fairly even distribution with the exception of two outliers: a significantly higher number of companies from the south east (this is even more pronounced if London is included), and a significantly lower number of companies from the north east. This corresponds to general financial inequality between these areas: something that no amount of patent legislation can easily address.

Usage by companies in Wales, Scotland, and Northern Ireland lags slightly behind: this again might be attributed to prevailing financial considerations. It may be that fewer of the larger companies, who can get much higher levels of value from Patent Box claims, are based in these places.

Are the aims of the Patent Box being met?

According to HM Revenue and Customs, the aim of the Patent Box is to provide additional incentive for companies to:

  • Increase the level of patenting of IP developed in the UK, and ensure that new and existing patents are further developed and commercialised in the UK;
  • Manufacture and sell those innovative products and services from the UK; and
  • Locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK.

These are lofty goals indeed (and ones which have full support from UK patent attorneys) but is the Patent Box actually progressing us towards them?

The second and third goals are somewhat beyond the reach of this article, and the Patent Box data made available, but we can at least interrogate the first with some vigour and see whether patenting activity has been affected by the introduction of the Patent Box.

It is difficult to see significant success here. According to statistics from the European Patent Office (EPO) the number of patent applications filed by applicants in the UK increased steadily in the years after the Patent Box was introduced, but that continued a pre-existing trend.

The number of applications filed per year has fallen since then, so it will be interesting to see how that is reflected in the Patent Box statistics in future years.

Furthermore, the statistics from the UK Intellectual Property Office (UKIPO) show a falling number of patent applications being filed in the UK by UK-based applicants.

There appears to be no evidence to suggest the Patent Box is somehow putting people off filing patent applications, but it is difficult to say whether the Patent Box has strongly encouraged new patenting activity on a macro scale.

Where next?

In 2017-18, 1,305 companies claimed some level of Patent Box tax relief. However, approximately 20,000 patent applications were filed by UK-based applicants at the UKIPO and EPO combined. It is apparent that those companies may include a large number of companies which had claimed Patent Box relief in previous years.

From this we can reasonably assume that there are still plenty of companies who could use the Patent Box, and are not doing so. Maybe we will continue to see the number of companies participating increase as the years go on, particularly as the legislation is still relatively new.

It seems that the aim of increasing the amount of patenting done by UK-based applicants is not yet strongly affected by the Patent Box. From the statistics mentioned above, we can infer that the bulk of Patent Box relief is being claimed by large companies which likely already took part in patenting-their overall IP strategies are probably not greatly affected by the availability of the Patent Box.

In order to better achieve this aim of the Patent Box, work needs to be done to bring new companies to the world of patenting and to further encourage patenting in those who are already involved.

In my experience, a common sticking point is the cost of the patent system: patent attorneys are not cheap, and official fees (more so at the EPO than the UKIPO) can be prohibitive. Some form of grant or funding to support companies with these expenses would certainly be attractive to get more companies interested in patenting.

This is doubly so as we enter into a period of economic uncertainty: patents can last for up to 20 years from filing so a lack of investment in IP now can have an effect on a company long after the economic climate has changed.

Furthermore, education about IP is important. There are already excellent schemes in place for this, via the government/UKIPO and through private endeavour, but perhaps some focus on IP with relation to the Patent Box can educate companies and inform new IP strategies.

New statistics are released each year: looking at the trends that develop will be very informative for those of us interested in fostering innovation and helping companies make the most of their IP by adding Patent Box tax relief to the suite of benefits they enjoy.

This article was originally published in WIPR. You can view the article here.

Matthew is a Partner and Patent Attorney at Mewburn Ellis. Working primarily in the chemical and materials science fields, he has significant experience of the intricacies of the EPO. Matthew advises and assists clients with all stages of drafting, prosecution, opposition and appeal before the EPO. Many of his clients are Japanese and Chinese businesses that are seeking European patent protection. These include multinational corporations in the fields of high-performance ceramics and carbon fibre technologies, as well as pharmaceutical and cosmetic companies. Matthew also works with several research institutions and university technology transfer departments across Europe.
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