Is this Britain’s most complicated business tax relief with a handful of large corporations getting the lion’s share? Local accountancy firm Ensors thinks so.
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.
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.
Government figures show there were 345 claims in London and the East of England in 2023/24, 15 down on the previous tax year, with £1,292 billion in tax relief compared to £938m the year before.
London and the East of England accounted for 65% of the £2 billon total for 2023/24, as it was for 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 538,000 (19.7%) in London and 271,000 (9.9%) in the East.
“No wonder, seeing that the eyes of bosses of innovation SMEs glaze over when they hear the words ‘nexus fraction’,” said Robert Leggett, Corporate Tax Partner at Ensors.
“Patent Box is arguably the most complicated business tax relief available and is in 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, added Robert.
Dating back to 2013, the scheme allows companies to pay a reduced effective 10% rate of corporation tax on relevant profits earned from patented inventions compared with the standard 25% rate.
“That is a significant financial incentive but beyond the understanding of many businesses which would otherwise benefit,” said Robert.
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.
Robert said: “The tax incentive favours the few, putting young and small businesses at a disadvantage. We at Ensors 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 focus the relief on IP that is actually developed in the UK by the claimant company, rather than bought in, explained Robert.
“And that’s just added to the other complexities that lose the interest of many eligible SMEs, such as cost streaming, the Routine Return and Notional Marketing Royalty.”
Robert added: “Since 2016, most SMEs, which account for the vast majority of businesses in the UK, find the rules so complicated that they cannot justify the compliance effort and so they 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 Ensors 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
Embrace the opportunity to review and re-write the requirements that form barriers to SME entrants, including complexities arising from the Nexus Fraction, cost tracking and tracing requirements, the Routine Return adjustment and the Notional Market Royalty restriction”.
Robert 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.
Last September, UK top 10 accountancy firm Azets acquired Ensors which has six offices in Bury St Edmunds, Cambridge, Huntingdon, Ipswich, Norwich and Saxmundham.
