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, which has offices in Leeds, Bradford and York.

Government figures show there were just 180 companies in Yorkshire and The Humber with claims in 2023/24, just five up on the previous tax year, with £57m in tax relief and £34m the year before; the region accounted for 3% as a percentage of the £2 billon total for 2023/24 – it was 2% in the previous year.

By way of contrast, 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 191,000 (7%) in Yorkshire and The Humber.

“No wonder the eyes of bosses of innovative SMEs glaze over when they hear the words ‘nexus fraction’,” said Steve Holmes, a Business Tax Partner who works with owner-managed businesses at Azets in Yorkshire.

“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 them hire staff, grow and develop, Steve added.

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 Steve.

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.

Steve, who is based in Azets’ Leeds office in King Street, 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 fraction”.

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 Steve.

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

He 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.”

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

Steve 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.