SMEs received only 5% or £100m of the £2bn in tax breaks claimed last year that are intended to encourage businesses to file more patents, says intellectual property (IP) law firm Mathys & Squire. The UK’s patent box tax relief can save companies tens of millions of pounds by reducing corporation tax on profits from patented inventions to 10%, down from the standard 25%. It was introduced to encourage business to invest in R&D and then patent their inventions and bring them to market. 

SMEs are estimated to generate 52% of the turnover of all UK businesses. Mathys & Squire says SMEs face higher barriers to claiming the tax break because of high compliance costs and uncertainty over whether their claims will be approved by HMRC. This can even deter them from investing in R&D in the first place. Andrea McShane, partner at Mathys & Squire, says: “Patent box can save businesses very significant amounts of corporation tax but in our experience only few smaller companies pursue this tax break. For many SMEs the costs and uncertainties of getting into the patent box regime simply outweigh the benefits.
“Some SMEs develop genuinely exciting inventions but give up on protecting them, potentially making it easy for competitors to imitate them, but also losing out on their patent box opportunity.”

McShane says patent box claims can be very complex, making it disproportionately costly for SMEs to pursue them. “Patent box claims can be challenging to prepare, which puts smaller businesses at a clear disadvantage compared to larger ones,” she explains. “Larger companies can afford more extensive protection of their IP, more sophisticated tax advice and accountancy tools to set up systems to track income relating to relevant patent rights. Small businesses working on tight budgets may not be able to afford that.”

McShane says the government must do more to help smaller companies benefit from the relief if it wants to improve the UK’s low level of R&D spend. Currently, spending on R&D in the UK is estimated to be 2.9% of GDP and behind countries such as the US (3.6%), Japan (3.4%) and Germany (3.1%). This could be achieved by removing requirements on SMEs specifically. It can also be more generous, for example through subsidies. SMEs could receive help in covering the costs of patenting inventions so smaller innovators are not discouraged by the expense of developing and protecting inventions.