The UK Patent Box scheme is a tax incentive program that aims to encourage and reward innovation by reducing the corporation tax companies have to pay on profits derived from patented inventions.
Is Patent Box available to SMEs?
Yes, the Patent Box scheme is available to all qualifying UK companies, including SMEs (Small and Medium-sized Enterprises).
It allows eligible companies to apply a lower corporation tax rate (10%) to profits deriving from patented products and processes. This tax rate is significantly lower than the standard UK corporation tax rate (currently at 19% but set to change to 25% in April 2023), resulting in significant tax savings.
It is important to note that the definition of SME for R&D tax purposes is slightly different than for normal EU reporting. You can learn more about those differences in our blog.
How do SMEs qualify for Patent Box?
To qualify for the Patent Box scheme, an SME must:
- hold a qualifying patent, which can be either a UK or European patent
- own or exclusively license the qualifying IP
- carry out qualifying development work on the patented invention
- carry out the work in the UK or the European Economic Area (EEA)
- incur expenditure on the work.
The qualifying project can include creating, or significantly improving, a product, process or service that is covered by the patent. Further conditions will also need to be considered and should be explored in detail with a Patent Box specialist.
Once an SME qualifies for the Patent Box Scheme, it can elect to apply the reduced Corporation Tax rate of 10% to profits earned from the patented invention.
This applies to worldwide income from sales or licensing of the patented product, process, or service.
Why doesn’t every SME claim Patent Box?
Despite being a generous incentive to encourage SMEs to develop and commercialise new products and technologies, many companies do not realise they qualify. There are a few reasons why an SME may not explore this opportunity, including:
- Lack of awareness: Many SMEs may not be aware of the Patent Box scheme and how it can benefit their business. They may not be actively seeking information about the scheme or exploring whether or not they are eligible.
- The scheme can be complex: The process of making a Patent Box claim can be time-consuming as the calculation is detailed and complex. Not all accountants or tax advisors have the expertise needed which is why using a qualified Patent Box tax specialist can help make it easier to understand and claim.
Learn more about Patent Box with our free guide
The Radius team at Shorts has produced a free Patent Box guide, which provides all the essential information an SME needs to know. This includes qualifying criteria, how it works, and how to get started with a claim. Alternatively, if you would like to speak to a qualified Patent Box expert, please get in touch with our team.
Other R&D Tax Relief opportunities for SMEs
SMEs can further benefit from their innovative activities through the R&D Tax Credit scheme, specifically the SME scheme. The SME scheme is a generous incentive designed to encourage companies to invest in R&D. Eligible SMEs can claim a higher rate of tax relief on their R&D expenditure than larger companies.
From April 2023 this scheme will be worth around 21.5% of qualifying expenditure.
Qualifying companies can combine R&D Tax Credits with Patent Box for excellent tax savings.
Darryl Hoy
Darryl is the Technical Director of the Radius team. He is a specialist in Research & Development tax reliefs, having previously worked at HMRC as an R&D Tax Inspector.
View my articles
