The reality of the situation
I meet with a lot of businesses that are carrying out innovative activity when dealing with claims for research and development (“R&D”) tax relief and it surprises me how few recognise the value of their innovation in the sense that they don`t consider their invention to be a form of intellectual property (“IP”) and if they do, they don`t understand the value of their IP.
Many business owners tell me that they don`t have time to sit down and think about protecting the things that they invent; they are too busy running their business and making sure that there is a business to operate.
I have clients that are extremely talented and wonderfully skilled in the products they design. I often hear that designs are prepared and sent to corporate clients for consideration in the hope of receiving a potential order. The designs are not protected and some orders fail to materialise. The inventions are now within the public domain and at risk of being copied by someone else. Given such innovation, it is surprising this talent is not being protected with some form of registerable IP right.
When I talk to businesses about patenting their inventions, many roll their eyes and either bemoan the cost of patenting or say that there is no point in patenting as it is very easy to copy an invention and patenting is not worth the money. (There are even some business owners I speak with that do not know what intellectual property is at all.)
My mission
Over the next few months, I am on a mission to educate as many business owners as possible, particularly those managing small and medium-sized enterprises, on what intellectual property is and the importance of managing and protecting it properly.
There are good and timely reasons why I am doing this. The Innovation Taxes Group at Claritas Tax is dedicated to helping companies claim the various tax reliefs that are available to innovative companies; Research and Development (“R&D”) Tax Relief, Patent Box tax Relief, and Creative Industries Relief. These tax reliefs exist to reward U.K. companies for the time and money spent on being creative and contributing to increased scientific and technical knowledge benefitting the U.K.
Innovation is important to Claritas because it is important to our clients. Our clients need the R&D tax savings or R&D tax credits to reinvest in the business and facilitate growth.
Success of Innovation tax reliefs & Patent Box uptake
Of the three innovation tax reliefs mentioned above, the R&D tax relief schemes are the most successful with the latest HMRC statistics (September 2021) revealing that the estimated total number of R&D tax credit claims for the year ending March 2020 is 85,900, an increase of 16% from the previous year.
The numbers of companies claiming Patent Box tax relief, by contrast, are far lower, with the latest HMRC statistics (September 2021) revealing that in the tax year 2018 to 2019, 1,405 companies claimed relief.
There has been much debate historically on the reasons for the low take up of Patent Box tax relief. The relief was introduced in 2013 and was initially met with much excitement as it promised huge corporation tax savings in addition to existing savings from claims for R&D tax relief. Companies were excited by the prospect of paying 10% corporation tax on IP profits as opposed to 19% (25% from 2023).
It is well documented that some of the reasons for the lack lustre response in terms of the numbers of companies claiming Patent Box Tax Relief are the complexities and confusion associated with administering the claims. The phasing in provisions, the R&D nexus fraction, streaming requirements, and requirement to elect in with punishment for deciding to elect out are all aspects that many consider to be cumbersome and deter the making of claims.
Low Patent Box claim numbers are not, however, what the U.K. Government wants. The Patent Box Tax Relief scheme is designed to encourage companies to keep and commercialise intellectual property in the U.K. In the last few years, the Government has taken several steps to promote innovation within the U.K. intending to make our country a world-leader in science, research and innovation.
The U.K. Innovation Strategy and Levelling Up
The U.K. Innovation Strategy, published in July 2021, makes it clear that innovation is central to the largest challenges that the world faces, from climate change and the ageing society to global pandemics and that investment in innovation is critical to achieving an agile economy that works for everyone and is fit for future generations.
Within the U.K. Innovation Strategy document and subsequent Levelling Up White Paper, the U.K. Government has published its roadmap into how it intends to promote and safeguard innovation.
As part of the overall strategy, a consultation has taken place into the effectiveness of the research and development tax relief schemes. There is a commitment to ensuring that the schemes meet the current needs of the companies innovating, are relevant to the type of expenditure being incurred and are achieving the ultimate goal of increasing spend on innovation within the U.K.
Turning back to the comment made at the beginning of this blog-that very few companies understand the value of their IP and that I have made it my mission to educate them about this, one of the reasons for doing this is to increase awareness of the Patent Box tax relief and ensure that all companies with qualifying patents are aware of the tax relief and the ability to claim significant corporation tax savings.
I consider it my duty to ensure that a company is fully aware of all tax incentives available to it, particularly where innovation is so high on the Government`s agenda.
Increase in main rate of CT to 25% in April 2023
The Government has declared its intention to increase the main rate of corporation payable on company profits to 25% as from 1 April 2023 and as such, I expect companies owing patents and making a profit from exploiting patented inventions, to be increasingly interested in the Patent Box. I also expect the numbers of companies claiming to increase in the next few years. From 1 April 2023, a company could achieve a 60% saving in corporation tax by taking advantage of the Patent Box.
Understanding the value of IP & the IP conversation
It`s important that a business understands those types of IP that are business-critical and require protection and those that are not. IP portfolios need to be reviewed regularly so that a business spends money on protecting and renewing those rights that are business-critical.
An understanding of the commercial value of IP has never been more important. It is essential to know that IP is just as important (sometimes even more important) than bricks and mortar, cars and other forms of goods owned by the business and that it has a commercial value.
IP is important to anyone requiring business investment. It is also a tradeable asset in the sense that licences can be granted to third parties over IP that the business is unable to commercialise itself. This can lead to a separate source of income in the form of licence income and/or royalties.
Potential patenting needs to form part of a larger conversation about IP. Patenting may be necessary to protect an invention and give rise to value from the patent. It may be considered as a source of potential licence and /or royalty income but it may also be considered as part of an overall tax strategy with Patent Box in mind.
It is clear that discussions about R&D tax relief and the Patent Box are part of a wider conversation that needs to take place with a business about innovation and the value of their IP. A joined-up approach is required where tax specialists are working with patent attorneys and other IP specialists. Exciting times lie ahead as we spread the message about the value of intellectual property.
