Patent box for software: six myths debunked

The software industry has been slow to grasp the benefits of the Patent Box regime. In part, this is down to a lack of awareness but, frustratingly, a number of myths exist that could be holding ambitious, innovative software companies back. From the belief that software can’t be patented to believing that the benefits are not worth the investment of time, these myths are creating business inertia. 

At ForrestBrown, we’ve seen the difference the regime can make to software companies, by taking their commercialised IP that one step further and allowing them to reinvest in business growth. That’s why we’re debunking these myths and setting the record straight so that your business can evaluate the opportunity and identify whether you’re eligible to claim Patent Box relief.

Demystifying Patent Box & software development

Patent Box has been available in the UK for over a decade, but many businesses are still unaware of the incentive. Many that are aware of it are unsure if it applies to them and don’t understand the significant benefits it delivers. This is especially true for the software industry, where innovation is often embedded into your day to day work.

According to HMRC’s 2024 statistics, the Information and Communications sector was among the top three sectors elected into Patent Box in the 2022/23 tax year. This may convey the impression that the regime is flourishing within this sector, but in actual fact, the number of companies that elected into the regime only amount to 4% of businesses claiming Patent Box relief. 

But while there are specific considerations that apply to software, patents for software are granted in their thousands each year. This suggests that thousands of businesses should elect into the regime and maximise the commercial benefit of their patent(s).

Six myths about using Patent Box for software

Patent Box is a powerful yet underutilised incentive for software development. But the myths surrounding it shouldn’t deter you from making the most of the opportunities Patent Box provides. You’re already pushing boundaries and leaving your mark within your industry, and with the rise of the Corporation Tax rate in 2023 making the benefit of Patent Box more valuable, there’s no reason why you should miss out if eligible.

The myths:

1. Patent Box can’t be used for software

It’s a common belief that Patent Box cannot be used for software development. This myth has stemmed from a misinterpretation of the Patents Act 1977 and Patent Rules 2007, which suggested that computer programme work was not “novel” enough to meet the requirements. However, that is no longer the case and many software and tech companies have successfully and legitimately claimed tax relief from Patent Box. 

The government has shared examples of income eligible for relief as part of Head 1 and 2 of the legislation. These examples include:

• Software that is sold directly to an end user via internet download, app, or as a disc in a box. 
• Income generated from software updates and maintenance. 
• When a device that uses patented software is sold, even if the device itself is not patented.
• As of 2024, certain uses of AI are also eligible for Patent Box relief, so long as that use is “inventive”. 

Essentially, you need to look beyond the term “computer programme” and focus on the difference your innovation can make. If you’re unsure about your eligibility, reach out to our team and we can discuss your claim.

2. Protection is the only benefit

Many think that patenting a product doesn’t have much value and that copyright is more effective. With copyright examples including swipe functionality in apps – used by multiple businesses – you can see why. But, unlike patents, copyright – and trademarks – do not come with tax incentives for businesses protecting their intellectual property. 

Patent Box is the government’s way of rewarding forward-looking businesses that drive change. Through the regime, you pay a reduced tax rate on profits generated through your IP. 

As an example, if your business’s total trade profits are £1,000,000, you split this by income generated through your IP. If £500,000 was earned through your IP, this is taxed at the Patent Box rate of 10% (£50,000). Your remaining profits are then taxed at 25% – the current Corporation Tax rate (£125,000). 

Once you’ve worked out the amount for each income stream, you can then add them together. This then leaves you with the total Corporation Tax due, which, in this case, is £175,000 – meaning you’ve saved £75,000 overall through tax relief.

3. A lot of work for little value

The software industry moves fast. In comparison, patent applications can take years, before you then elect into Patent Box, concluding what can feel like a long process. And if what you’ve invented feels on a smaller scale – even if it is a unique problem-solving solution – you may feel that navigating all these complexities isn’t worth it.

Here at ForrestBrown, we’ve seen how Patent Box can make a positive difference for your business. We can support you with your IP portfolio management, partnering with reputable IP advisors to understand asset ownership and provide technical knowhow on exclusive licences. From determining your eligibility to tracking revenue streams and calculating your R&D fraction, we’re here for you every step of the way.

4. You haven’t invented anything worthwhile

With so many new products and developments launching all the time, the definitions of “new” and “novel” can feel blurred. However, even the smallest inventions can be amplified with the Patent Box regime. 

In HMRC’s examples of patented software, maintenance and updates to licensed software are eligible for Patent Box – even if, in some cases, you don’t own the software yourself. 

Another example includes cloud servers. If your company server is processing customer data, then the royalties earned from this server may be eligible. Or, if end users use your licensed software on a server your company owns and runs – like the Cloud – then you can claim Patent Box relief on any income generated from this licence. 

You don’t need to create a whole new product or device to obtain a patent and reap the benefits of Patent Box – a reconfigurement can be enough.

5. You can’t claim both Patent Box and R&D tax relief

Another common belief is that you can only apply for R&D tax relief or Patent Box relief – not both. This is not true, they are not mutually exclusive reliefs. In fact, since 2021, you must link the Patent Box claim to your R&D expenditure as part of the nexus regime. Essentially, to qualify for Patent Box, you need to demonstrate that you completed qualifying R&D activity while creating your patented IP. 

This means that these two incentives are now intrinsically linked. When used in conjunction, R&D and Patent Box are a powerful pairing that rewards your business for its innovation and growth. You’ll benefit from each stage of your IP’s lifecycle, whether that’s through R&D tax credit or reduced Corporation Tax. 
Learn more about how R&D tax and Patent Box work together, or speak to our team of experts for more guidance.

6. It’s too complicated

As with any tax incentive, tracking profit, working through the legislation and trying to make sense of the complexities of Patent Box can seem like a long, daunting task – especially after you’ve already spent time establishing your eligibility. 

This is where ForrestBrown comes in. We can handle all the complications on your behalf, removing the complexities as we work through your claim. Our chartered tax advisers will map your revenue to your IP activity streams, encompassing sales, royalties and licence fees. 

We know that your claim will be unique to you, which is why we take the time to understand your business. We’re passionate about supporting growth and want to see your business thrive through constant transformation and development. We’ll communicate with you throughout every step, demystifying the Patent Box process so you fully understand your claim and maximise the benefits of commercialising your IP.

Patent Box for software

ForrestBrown’s experienced, multi-skilled team makes us ideally placed to untangle the complexities of Patent Box and R&D tax relief claims. Through our tailored, proactive approach, we efficiently analyse and identify opportunities and help navigate the legislation. This ensures that the regime fully rewards your IP. Get in touch with our team to see how we can help your business.