A guide to the Patent Box and how to qualify

The Patent Box regime was introduced in the UK in 2013 as a tax incentive allowing companies to apply a lower rate of Corporation Tax to profits earned from their patented inventions. The Patent Box is designed to encourage companies to keep and commercialise intellectual property in the UK.

Eligible companies must elect into the Patent Box to benefit from a reduced effective rate of Corporation Tax of 10% on income derived from the commercial exploitation of patents.

How do businesses qualify for the Patent Box?

A company will qualify if it owns patent licences in intellectual property (IP) rights, or exclusively licences the rights to those patents, and has undertaken qualifying development on them.

If your company is a member of a group, it may also qualify if it or another company in the group has undertaken qualifying development for the patent, by making a significant contribution to either the creation or development of the patented invention, or a product incorporating the patented invention.

Companies who are part of a group must also meet an active ownership requirement – so although your company doesn’t have to make all the decisions regarding the portfolio, it must undertake a significant amount of the management.

So, we don’t have to be making profit from our own inventions to qualify?

No – patent holders often license their inventions for others to develop, and if your company holds licenses to use someone else’s technology, you may still benefit from the Patent Box, as long as you meet certain conditions.

In order to qualify for the Patent Box, you must have:

• Rights to develop, exploit and defend rights in the patented invention.
• One or more rights to the exclusion of all other persons (including the licensor).
• Exclusivity throughout at least an entire national territory – rights to manufacture or sell within part of a country, for example, would not qualify as exclusive.

What income qualifies for the reduced tax rate?

Not all income qualifies for the Patent Box. To be eligible for the effective Corporation Tax rate of 10%, the income will need to be derived from:

• The sale of patented items or those that incorporate a patent, such as the sale of spare parts,
• The licensing of patent rights,
• The sale of patent rights, or
• Any compensation income or damages from the infringement of owned rights.

There is also specific income which does not qualify for the Patent Box, including:

• Income from regular activities, earned regardless of patent rights.
• Income from marketing asset return (i.e. income earned from branding, rather than from technological innovation itself).

How to claim Patent Box relief?

You have to make an election to benefit from the reduced rate of Corporation Tax that applies to the Patent Box within two years after the end of the accounting period in which the relevant profits and income arose. You can do this in the computations accompanying your Company Tax Return or separately in writing, but there is no special form of words for this election.

The calculations for determining the qualifying expenditure for Patent Box tax relief are complex, and have become increasingly so since the transition to a new regime in 2016, which became mandatory for all claimants from July 2021. It is therefore recommended to seek expert professional advice on the Patent Box as early as possible.

The basic principle is that routine company profits are deducted from total profits to arrive at a ‘qualifying residual profit’. Companies are then able to make a further reduction for marketing asset return (a different calculation depending on whether you are deemed a large company or an SME), with the remaining profit attracting the Corporation Tax rate of 10%.

A more detailed description of the calculation required can be found on the HMRC’s How to claim Patent Box tax relief page.

The latest changes to the Patent Box have added to the complexity of the calculations, by introducing a requirement for every individual IP right, patented product or product family to be separately ‘streamed’ – meaning that a company with five patented products will need to carry out five separate calculations, allocating income and expenses to each – and also adding a ‘Nexus Fraction’ to the calculations, in a move to link the Patent Box benefit more closely to the company’s R&D activities. You can find out more details about the Nexus Fraction calculations here.

What to do next?

Patent Box is a complex form of tax relief, albeit it can be one of the most beneficial regimes for some companies to reduce their Corporation Tax payable. HMRC statistics last published in September 2023 suggest the total value of relief claimed under the Patent Box is increasing, however it is an area where professional advice is recommended to assist with a company’s decision to elect into the regime and calculate the tax benefit available.