The Patent Box scheme: protecting assets and reducing Corporation Tax within manufacturing

Posted on 21 Jul 2022 by The Manufacturer

UK manufacturing and innovation is booming and since the Chancellor announced the reform of Research and Development (R&D) tax credits in the Spring Statement 2022, there has been a lot of discussion around the possibility of a more generous system to continue supporting development and growth. This news was widely welcomed by UK-based engineering and manufacturing companies who are already benefiting from the R&D tax credit scheme, which supports the development of innovative AI, robotics, manufacturing, and design solutions.

But as manufacturing and material costs continue to increase, it is more important than ever for companies to find ways to ramp up profits and investments to meet demands and survive in the competitive market. This is where the Government’s Patent Box scheme can really benefit companies – especially those already receiving R&D tax credits.

Understanding The Patent Box scheme

The Patent Box scheme has been designed to encourage companies to keep and commercialise Intellectual Property (IP) in the UK by protecting new products and processes that result from R&D. As well as the conventional benefits of patent protection, the scheme also allows companies to apply a lower rate of Corporation Tax to profits earned from patented inventions.

Despite the obvious attraction, there is still a low take-up within the engineering and manufacturing sectors. In comparison to R&D tax credits, there seems to be a lack of understanding of the benefits available.

Peter Corley, Associate Director at Gateley Capitus and Nic Ferrar, patent attorney at Adamson Jones, part of Gateley, explore The Patent Box scheme and the potential benefits for engineering and manufacturing businesses.

A missed opportunity for many companies

When exploring the lack of take-up and potential barriers to companies claiming, Peter Corley explained: “If engineering or manufacturing companies are designing and creating innovative solutions, they are likely to have IP which would be eligible for Corporation Tax savings through The Patent Box scheme. Sounds simple, right? Yet the latest Official Statistics data from HM Revenue and Customs (HMRC) show that fewer than 2,000 companies claimed this relief.

“If manufacturing and engineering companies are claiming R&D tax credits, they could also be using the Government’s Patent Box scheme to lower Corporation Tax rates and further ramp up profits and investments.

“So why is the take-up of The Patent Box scheme so low when so many companies in the UK hold patents? I think it’s the lack of understanding of what and who the scheme applies to and the application process itself.

“Any company that is designing and manufacturing products could be eligible to claim for The Patent Box scheme. It doesn’t have to be a revolutionary change in technology to achieve patent protection. Many smaller, incremental changes to products could be eligible provided they arguably address problems with existing products. The most important thing is that companies speak to advisers as early as possible about their plans so there is still the possibility of securing a patent.

“And if the product is an integral part of a wider system, you may be able to claim for the profit of the whole system – not just the part.

“A common misconception can be that the scheme is just for large companies. The Patent Box scheme can make a significant difference for small businesses too – even if they only have one or two products. The scheme can be applied to the smallest of innovations, as small as an additive in a type of glue being applied to hundreds of products.

“I can guarantee companies will be surprised to find out what savings they are missing out on because of lack of awareness of what is actually eligible. If companies are already claiming R&D tax credits – they really should be exploring The Patent Box scheme for further benefits.”

Understanding the added value and benefits to engineering and manufacturing businesses

When examining the value of The Patent Box scheme, and the protection of intellectual property, to engineering and manufacturing businesses, Nic Ferrar claimed: “There really is a mixed opinion of The Patent Box scheme within the industry. At its core, IP protection is the ability to protect products and services from copying, however, there are many other positive impacts on business alongside Corporate Tax savings.

“IP protection is known to have a positive impact on share price. This is commonly understood by the larger organisations who see it as an indicator of their ability to sustain or increase profitability by demonstrating innovation. However, we see it clearly in smaller, privately-owned companies also, particularly when those companies are valued prior to sale/exit or when they are seeking investment.

“As the engineering and manufacturing sectors start to become IP heavy, companies will need to consider creating their own IP portfolio to remain credible in those industries. As companies increasingly turn to IP protection, it is getting harder to avoid stumbling into someone else’s patents when developing new products. Applying for a patent yourself will help provide some insight into what competing technologies have been patented already, and who by. As well as this, applying for a patent early can give companies the edge against competitors in the marketplace by demonstrating they are at the forefront of design and innovation.

“In terms of potential barriers preventing companies from applying for The Patent Box scheme, the Government has made more funding available in recent years to help start the process. This includes covering the costs of IP audits to allow companies to examine what assets can be protected.

“Following on from what Peter Corley said, there are many benefits of The Patent Box scheme – even for smaller companies – as IP protection can help attract outside investment to achieve growth and development plans. For larger companies, or those entering overseas markets, having IP protection in place is essential to provide some control over distributors or other collaborators.

“In terms of the patent application, there is a common misconception that the process is expensive and time-consuming or could take several years to complete. Recently, we have been focusing on achieving a quick turnaround for our clients so they can start taking advantage of the UK’s Corporation Tax relief scheme. UK patents can be granted in less than a year if we are clear from the outset that the tax incentive is a key driver for achieving patent protection.”

Appointing a professional adviser to advise and complete The Patent Box scheme application is becoming increasingly popular. An experienced tax professional will be able to look at processes and help companies find missed opportunities for reducing Corporation Tax and protecting IP through The Patent Box scheme.

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About the authors

Peter Corley, associate director at Gateley Capitus (1)Peter Corley, is Associate Director at Gateley Capitus. Having held financial and business advisory roles throughout his career, Peter has a great understanding of the funding and incentives available. Peter has many years’ experience of working closely with a variety of companies to help them achieve their goals, having successfully done so with large multinational companies through to new start-ups. He has helped all sizes of companies to assess their Research & Development costs to see how they can claim through the R&D tax relief and credits schemes.

Nic Ferrar, patent attorney at Adamson Jones (1)Nic Ferrar is Director and Patent Attorney at Adamson Jones. Nic holds a Masters of Mechanical Engineering degree from the University of Leeds. After graduating, Nic took a commercial role within the engineering software industry, which involved managing accounts in the automotive, aerospace and marine industries. Nic joined the patent profession in 2003, working for a London-based private practice. Since that time Nic has also gained experience in industry, at Rolls-Royce plc, where he both handled a patent prosecution caseload and advised the business on commercial Intellectual Property matters.