Patent Box: what the Budget means for this valuable incentive

For those of us advising on innovation incentives and reliefs, any proposals intended to make it easier for businesses to invest and innovate, as set out in the Treasury’s Budget Day publication, Corporate Tax Simplification for Business Investment, are to be welcomed.

While recent changes to R&D tax relief might have stolen the headlines, confirmation that the government is also looking to gather stakeholder feedback on Patent Box is significant, particularly since it’s the first consultation for the incentive to have been launched since 2015.

For more information on how Patent Box currently works, view our Patent Box Explained page.

What does the programme aim to achieve? 

As its title suggests, the overall programme aims to simplify the Corporation Tax system to support business investment, growth and competitiveness. The publication includes a chapter considering various reliefs and incentives relevant to investment and innovation, including R&D tax relief, capital allowances, intangibles and Patent Box.

With respect to Patent Box, several areas are flagged for consideration. The overriding concern is the apparent complexity of the Patent Box computation. The publication suggests that simplification would be beneficial; improving compliance, reducing the administrative burden and better supporting companies accessing the relief.

Our experience suggests that Patent Box is a valuable, yet underutilised, tax relief. According to HMRC’s latest Patent Box statistics, only 1,735 companies elected into the Patent Box regime in 2024/25, compared to the thousands of patents granted annually. Of those that did claim the relief, 28% were large companies, which received 95% of the total relief. Simplifying the incentive to make it more accessible, particularly to SMEs, is positive.

In an area where risk should be carefully mitigated, the aim of improving compliance is also welcome. We are aware that HMRC is also considering introducing certain mandatory disclosures within the tax computation in relation to Patent Box, and this should be considered alongside any measures to simplify the overall Patent Box calculations.

Simplification of the Patent Box computation

Small companies

Based on stakeholder feedback, the consultation identifies various areas within the computation of IP profits that can be challenging to navigate, particularly for smaller companies. These include the Marketing Assets Return (MAR), computational elections and notional royalty calculations. The consultation proposes reducing the administrative burden on companies with an income below a de minimis threshold by enabling certain steps in the calculation to be simplified, or excluded entirely. 

The Patent Box legislation does currently provide various small claims elections, which allow companies to:

• simplify their calculation of MAR, by replacing the calculation with a 25% reduction),
• treat 75% of IP derived income as the figure for the notional royalty, and
• allow a global stream rather than streaming at the level of individual IP rights.

A company which meets the criteria can elect to apply any or all of these elections.

Given that 95% of the relief goes to large companies, it’s reasonable to assume that those companies would not meet the criteria to qualify for any of the small claims elections. On that basis, the suggested changes may not significantly affect them.

On the other hand, smaller companies that aren’t aware of the relief, or are aware, but find it too opaque, would likely already qualify for the small claims elections, albeit the existence of various elections might in itself feel overly complicated (for example, considering which election applies when, and what the eligibility criteria are).

Given these variables, we’ll need to see the detail of the proposals for ‘simplification’, to assess whether they would have a meaningful impact.

Marketing assets return

Many companies may already self-assess that this figure should be zero (if, for example, spend on marketing/branding is regarded as minimal), so in practice it is already a calculation step they may not need to consider in detail. Similarly, and as noted above, companies for whom MAR might not be nil, but do qualify for small claims treatment, can deem MAR to be 25% of their Qualifying Residual Profits (QRP). 

If the proposal is to allow companies of a certain size, or with profits below a certain threshold, to exclude MAR from the calculation entirely, it may not directly impact the amount of time spent on the calculation. However, being able to exclude a step from the calculation in full may in itself prove helpful, by removing a perceived compliance hurdle.

Global streaming

In the absence of a small claims election, HMRC’s expectation is that IP streams are streamed to the lowest level possible, i.e. by individual IP right. Companies that have only one or two patents that may cover broadly the same type of product sale may already be legitimately preparing calculations based on a single IP income stream.

Larger companies may be more likely to have multiple IP streams corresponding to several patents/IP rights.

It will therefore be interesting to see whether the proposal is to simplify this for everyone – including large companies – or only companies of a certain size, or with profits below a certain threshold, and what the ‘lowest’ acceptable level of streaming might be.

Routine return figure 

A further area highlighted for potential reform is the calculation of the Routine Return Figure (RRF), which could be revised to include sector specific percentages. This will, it states: “reflect differing sector needs and reduce the administrative burden on customers”.

Calculation of the RRF currently requires a review of all tax-deductible expenditure that sits under one of a number of prescribed ‘Heads’ of expenditure as set out in the legislation.

Replacing this with a flat percentage may be attractive as it simplifies the calculation and makes the process more efficient.

However, there are a number of factors which will need to be considered. For example, considering how ‘sectors’ will be defined for this purpose, and how the appropriate percentages will be determined for each sector.

We have seen that adopting a narrow approach based on SIC codes, as HMRC’s volume compliance approach did during its random enquiry period, can give rise to a number of anomalies.

Consideration should also be given to whether the option to apply a flat, sector based, figure for the RRF will be optional, or whether a company will retain the right to calculate their RRF based on actual expenditure figures where this may result in a more appropriate outcome.

Find out more about electing into the Patent Box regime.

Key takeaway

The overall sentiment of the proposed changes, with the overriding objective to simplify the calculation, is of course positive. 

Each of the areas identified for further consideration represent different steps in the calculation. Consideration will need to be given to whether any proposed changes will be intended to apply on a blanket approach to simplify the whole calculation of IP profits (e.g. by removing all of these factors from consideration), or whether different criteria will apply to each of the individual steps.

What’s next?

The government invites stakeholders to confirm their interest to contribute to the consultations via email by 11:59pm on 21 November, and it is recommended that interested stakeholders do so. Perhaps inevitably, the consultation paper raises significant questions and it will be important for HMRC to gather these for review – particularly alongside other ongoing projects.

While questions remain, the underlying principle of simplifying access to Patent Box is welcome. The relief is valuable and making it more accessible, particularly for smaller businesses, would be a positive step forward.