Calls for £2 billion Patent Box tax relief to be unwrapped for far more companies

Is this Britain’s most complicated business tax relief?

…with a handful of large corporations getting the lion’s share

A complicated tax relief aimed at encouraging companies to commercialise their innovations within the UK is in dire need of reform because it favours the few, it emerged today.

Reform of the Patent Box scheme is said to be long overdue because it is reportedly beyond the understanding of many businesses which would otherwise benefit from the tax break.

The clarion call for change has been sounded by UK top 10 accountancy and business advisory firm Azets, with offices in Aberdeen, Ayr, Edinburgh, Glasgow, Inverness and Perth.

Government figures show there were just 65 companies in Scotland making claims in 2023/24, five down on the previous tax year, with £118m in tax relief and £78m the year before; Scotland accounted for 6% as a percentage of the £2 billon total for 2023/24 compared to 5% in the previous year.

According to latest annual business activity figures from the Office for National Statistics, as of March 2025, there were 2.73 million VAT and/or PAYE businesses in the UK, with 173,000 (6.3%) in Scotland.

“No wonder the eyes of bosses of innovation SMEs glaze over when they hear the words ‘nexus fraction’,” said Gemma Monaghan (pictured), a Patent Box tax specialist and Head of R&D Tax in Scotland for Azets.

“Patent Box is arguably the most complicated business tax relief available and is dire need of reform because SMEs are put off by the sheer complexity of the claims process.”

SMEs in the past used the savings to reinvest in technology or new inventions which would have helped hire staff, grow and develop, added Gemma.

Dating back to 2013, the scheme allows companies to pay a reduced effective rate of corporation tax on relevant profits earned from patented inventions of 10%, compared with the standard 25% rate.

“That is a significant financial incentive but beyond the understanding of many businesses which would otherwise benefit,” said Gemma.

Based on latest figures from the government, the value of relief to 1,650 companies in 2023/24 was around £2 billion; large companies accounted for 95% of that.

Research by TaxWatch found that more than half of the tax break went to just 10 companies, and over a quarter to just one.

Gemma said: “The tax incentive favours the few, putting young and small businesses at a disadvantage. We at Azets bang the drum for SMEs, of which there are just over 1.4m, and call for an overhaul of Patent Box to level the playing field.”

Following international pressure in 2016, changes were made to align the Patent Box regime with global tax standards.

In doing so, calculations were restricted to just one method, which was “the most complex and brought in the nexus faction”.

The nexus fraction is a formula used to assess the portion of profits eligible for the reduced effective tax rate of 10%, showing that the claimant is involved in genuine innovation, explained Gemma.

“And that’s the point where you lose the interest of many eligible SMEs.”

 She added: “Since 2016, most SMEs, which account for the vast majority of businesses in the UK, find the rules so complicated that they either cannot justify the compliance effort or miss out on relief altogether.

“Reforming the Patent Box could help unlock more inclusive growth, making the UK a genuine hub for innovation at every level of business.”

According to latest annual business activity figures from the Office for National Statistics, as of March 2025, there were 2.73 million VAT and/or PAYE businesses in the UK, with 173,000 (6.3%) in Scotland.

Azets says it would like to see Patent Box made:

• Simpler, with clearer guidance and fewer administrative hurdles so SMEs aren’t deterred from applying for it
• More targeted by focusing on encouraging UK-based R&D, manufacturing and job creation
• Rules should go back to the way they were before the 2016 changes; simply charge an effective 10% corporation tax rate on relevant profits from patented technology, rather than the standard rate of 25%, and remove the nexus fraction

Gemma said: “If a business holds patents or invests in new products or processes, now is a good time to review the Patent Box position and prepare for possible changes ahead.

“We feel that if a business has gone to the effort of registering a patent, they should get relief on any profits made on that product which contains the patent – it is as simple as that.”

Based on the government’s 2023/24 figures for Patent Box tax relief, manufacturing was the sector accounting for most of that, at 61% (1,000 companies), followed by wholesale and retail at 10% (165 companies) and, at 9% (150 companies), professional, scientific and technical activities.

Ends

Source for Patent Box claims figures https://www.gov.uk/government/statistics/patent-box-reliefs-statistics/patent-box-relief-statistics-september-2025

Breakdown by regions, with number of companies, amount of tax relief and tax relief as percentage of the £2 billion total for 2023/24, with previous financial year 2022/23 in brackets for comparison:

East Midlands, 130 (120), £28m (£16m), 1% (1%)

London and East England, 345 (360), £1,292 billion (£938m), 65% (65%)

North East, 40, (40), £12m (£9m), 1% (1%)

North West, 170 (165), £81m (£94m), 4% (7%)

Northern Ireland, 75 (70), £25m (£13m), 1% (1%)

Scotland, 65 (70), £118m (£78m), 6% (5%)

South East, 255 (260), £128m (£98m), 6% (7%)

South West, 140 (140), £45m (£70m), 2% (5%)

Wales, 75 (70), undisclosed, undisclosed percentage

West Midlands, 170 (165), £91m (£41m), 5% (3%)

Yorkshire and The Humber, 180 (175), £57m (£34m), 3% (2%)