Patent Box tax relief must be opened up for more companies
The UK’s Patent Box regime – one of the most complex business tax incentives – is in urgent need of reform. While the scheme was designed to reward innovation and encourage investment, its dense calculations and significant administrative burden have pushed many SMEs away from claiming relief they are entitled to.
A relief designed for innovation, but out of reach for most SMEs
Introduced in 2013, Patent Box allows companies to apply a reduced 10% effective corporation tax rate on profits arising from patented inventions, compared with the standard 25% rate. For innovative businesses, that difference can be transformational – freeing up cash to reinvest in research & development (R&D), people, technology and new product development.
However, the complexity of the rules means many SMEs can’t justify the compliance effort. Instead, they are missing out on valuable relief that was intended to fuel growth.
Government data shows that in 2023/24, just 1,650 companies claimed Patent Box relief worth around £2bn, with large companies accounting for 95% of that total. Research by TaxWatch highlights the concentration further: more than half of the total relief went to just 10 companies, and over a quarter to a single organisation.
For a regime meant to encourage broad-based innovation, the imbalance is stark.
2016 changes increased complexity
The current challenges can be traced back to reforms introduced in 2016 to align the UK regime with international tax standards. Those changes:
- Restricted the calculations to a single, highly complex methodology.
- Introduced the nexus fraction, a formula requiring detailed tracking of R&D expenditure to demonstrate genuine innovation activity.
For many SMEs, that is the point at which Patent Box stopped being viable.
Why reform is needed now
SMEs make up more than 1.4 million UK businesses. Many hold patents, develop intellectual property or bring new products and processes to market – yet they are disproportionately under represented in Patent Box claims.
Reforming the regime would support more inclusive growth, strengthen the UK’s innovation ecosystem and ensure smaller businesses are not left behind.
What Azets would like to see
To rebalance the regime and make it genuinely accessible, Patent Box should be:
- Simpler – Clearer guidance, fewer administrative hurdles and a process that SMEs can realistically navigate.
- More targeted – Focused on UK-based R&D, manufacturing and job creation.
- Realigned with the original intent – Returning to the pre-2016 approach by taxing relevant patent profits at a flat 10% rate and removing the nexus fraction.
These suggestions were submitted to the Chancellor by Heather Williams, Partner at Azets. If a business has gone to the effort of registering a patent, they should receive relief on the profits generated from that patented technology. It should be as simple as that.
Time for businesses to reassess their position
For companies holding patents or investing in new products or processes, now is the right time to review their Patent Box eligibility and prepare for potential changes.
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