More small businesses should consider Patent Box to reduce their tax burden explains Jemma Vaughan at Hazlewoods

By Kirsty Muir

14 November 2022

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The Business Magazine article image for: More small businesses should consider Patent Box to reduce their tax burden explains Jemma Vaughan at Hazlewoods

Not enough small companies are taking advantage of a government backed tax benefit. We find out why from Jemma Vaughan at Hazlewoods Accountants and Business Advisers.

Who wouldn’t want to reduce their corporation tax bill by half on profits derived from exploiting patents that they own?

It’s a no-brainer. Yes, says Jemma Vaughan, Innovation and Technology Director at Cheltenham-based accountants and tax advisers Hazlewoods, but not nearly enough companies know about it or are claiming it.

According to the Office for National Statistics, in the tax year 2018–2019, 1,405 companies claimed relief under the Patent Box, and the total value of relief claimed was just £1.1 billion.

And of the companies that claimed in that tax year, 28 per cent were classified as ‘large’, but these companies accounted for the vast majority of the total relief claimed.

| So what’s stopping smaller, innovative companies from claiming Patent Box relief?

Claiming can be complicated, and not enough professional fi rms are geared up to help, particularly those servicing the SME market because they don’t encounter eligible companies in sufficient numbers to make it worthwhile investing time in understanding the Patent Box rules and promoting it to their clients.

This tax incentive therefore remains in the realms of a “minority sport”. While countless boutique firms offer to help companies identify and apply for R&D tax relief, they seldom touch Patent Box because of its complexity and its deeper roots in the wider tax legislation, according to Jemma.

“We find that many R&D boutique companies don’t have tax software powerful enough to be able to handle Patent Box claims. While they understand R&D tax credits, and we work with a number who can very competently prepare R&D claims, for the unwary the Patent Box can open a Pandora’s Box of difficulties.

“We do try to encourage smaller accountancy practices to take advantage of our Patent Box expertise for their clients,” added Jemma.

| Will my business qualify for Patent Box?

Initiating a tax relief claim through Patent Box isn’t simple. But the long-term rewards are worthwhile for those businesses with a strategic plan.

When a company approaches Hazlewoods, Jemma’s team undertake initial calculations to see if it’s worthwhile for the company to elect to claim the Patent Box at all.

“It’s based on profit, so if you are at the very early stages of commercialisation, you are not necessarily going to be making substantial profits,” she explains.

“We have prepared an information pack to help companies collate the information we need, to gauge whether there may be savings available for them and, if so, an approximate idea of the amounts involved.

“We invest our time in the initial stages to work out whether it’s worthwhile going down that route at all.

“Generally, a company must have a certain level of margin on their projects to make it worthwhile, and that’s not an absolute percentage; it depends on the company’s overall tax position.

“Our initial calculations will help a company decide whether to take it further. Then it’s a matter of taking the data associated with the patent costs and crunching through the numbers.”

| Planning ahead is vital if you want to make the most of tax reductions

It sounds like a lot of work, and it is – mostly for the tax adviser. However, unlike claiming for R&D tax credits, which requires a company to write a report every year on its research and development activities even if the figures invested stay relatively similar, after the initial investment of time to set Patent Box up in the first year, with the right knowledge and tax software, it is relatively painless for clients to claim in subsequent years.

“It’s a reduction in your corporation tax bill and is there to encourage reinvestment in your research and development programme if you wish,” explains Jemma. “But ultimately it’s up to you what you do with the tax saving.”

Jemma urges any business wanting to take advantage of Patent Box to factor it into their planning early.

“Looking at the potential for making a Patent Box claim is worth doing even if you have been exploiting a patent for years. A few minutes of advice in the early stages of the company’s development cycle could save substantial sums later on.

“Think about taking advice before you start the research and development process, perhaps when you’re looking at potential grants, even before you have a product that could potentially be patented.”

Why? Because how you set up your business operations could affect whether you will be able to apply successfully for this valuable tax relief.

Jemma’s team has recently been doing some planning work for a client in the MedTech sector.

“They created a spin-off company to sell their product. The main trading company created the product, incurred all the production costs, put on a small margin to sell to the spin-o‑ company and a larger margin is then realised through the spin-out company.

“But Patent Box can only apply to the one company, which they weren’t aware of, so by channelling sales through a separate company, they made part of the profits ineligible for the relief.

“We have been advising the group on planning to avoid such “leakage” from the Patent Box and to make sure that they maximise the tax savings to which they are entitled.

“The group is also looking at future patents so by planning now we are enabling them to make the most of the tax incentives in the future.

“We should be able to get them into a position where they will benefit strongly the second time around.”

IP holding companies are another classic example of a situation that requires careful planning and thought if you want to apply for Patent Box, she adds.

“Many companies think, quite rightly, that keeping IP rights in a separate legal entity is good because they can be ringfenced from business risks such as litigation or financial difficulties. While these are certainly very strong commercial reasons, from a Patent Box perspective separating IP rights into a different company can give rise to issues and traps that need to be carefully navigated.

“Why shouldn’t any business which has invested months or even years in developing new innovations, benefit once the product is on the open market? And with the freedom to use those tax savings how you wish, your patent could not only pay for itself but could also make a considerable financial difference”

| So is it all worth it?

Definitely for many more companies than currently claim, says Jemma, and with British businesses facing some tough years ahead, why wouldn’t a company want to claim back every penny in tax possible?

“Why shouldn’t any business which has invested months or even years in developing new innovations benefit once the product is on the open market? And with the freedom to use those tax savings how you wish, your patent could not only pay for itself but could also make a considerable financial difference.

For further information on Patent Box please contact Jemma Vaughan, Director at Hazlewoods, on 01242 680000 or email [email protected]