Patent Box explained

The UK Patent Box regime is designed to encourage companies to keep and commercialise their Intellectual Property (IP) in the UK. It does this by reducing the Corporation Tax rate on profits generated through patents to an effective rate of 10%.

​​The Patent Box deduction reduces taxable profits, lowering the overall tax liability of the company.  R&D and the Patent Box are now intrinsically linked and work together to reward innovative companies within the UK.

Although a significant relief for any UK business investing in R&D and protecting the IP generated, it remains one of the lesser-known tax incentives. ForrestBrown’s award winning tax team is passionate about helping innovative businesses unlock the value of Patent Box. Here's everything you need to know about the Patent Box relief, from eligibility to example calculations.

Angela Banerjee, Associate Director at ForrestBrown.

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What is the Patent Box regime?

​​The Patent Box regime is a tax deduction for businesses deriving profits from the IP that they have developed, protected and taken to the market. The aim of the regime is to encourage businesses to drive technology within the UK through their R&D activities and to ensure the revenue generated stays in the UK.

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Is your business eligible for the Patent Box relief?

There are a number of qualifying criteria a business must meet in order to claim the relief. This includes:

  • Being liable to corporation tax
  • Making profits from the exploitation of patented inventions
  • Owning or having an exclusive over patents
  • Undertaking qualifying development of the patent
  • Where part of a group a company meets the active ownership condition

Where a company can confidently tick off each of the above, they should consider further advice on electing into the regime.

What qualifies for the Patent Box tax relief?

It’s important to know exactly what income qualifies for Patent Box as this is used to calculate your relief. The Patent Box legislation sets out exactly what income streams count as relevant IP income – there are 5 streams or heads in total as covered below.

Qualifying income for Patent Box

Qualifying income for UK Patent Box must relate to selling patented products. It can include income from the following:

  • products incorporating the patented invention e.g. bespoke spare parts
  • licensing out patent rights
  • selling patented rights
  • infringement income and damages/insurance or other compensation related to patent rights

What patents are eligible for Patent Box?

For patents to be eligible for the UK Patent Box regime they must be granted by UK IPO, European PO or any of the following countries: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, and Portugal.

How is the Patent Box benefit calculated?

Once a company has identified its IP income it must stream that income. This means calculating the IP profits in a ‘just and reasonable way’, allocating costs to the IP income sub-streams. This methodology can prove more beneficial than the old formulaic method as a company’s IP income can often have higher profit margins.

In the below Patent Box example, we use a company with profit derived from its IP of £1 million. We take you through how the benefit of the Patent Box is calculated and the potential benefit.

YE 31 December 2024
IP profits £1,000,000
R&D fraction 1
Relevant IP profits £1,000,000
Patent box deduction* £600,000
CT saving £150,000

The Patent Box deduction assumes a current CT rate of 25% and is calculated as follows:

((25%-10%)/25%) x £1,000,000

For more examples, visit the .gov website.

Calculating R&D fraction / Nexus R&D Fraction

From 1st July 2021 onwards all Patent Box claims must link relevant R&D expenditure to the patent/patented process. This means an R&D fraction must be calculated for each type of IP held, for the relevant streams of income. The intention is to limit access to lower rates of CT to companies that can demonstrate a nexus (link) between the R&D undertaken and the tax benefit derived.

The R&D Fraction is a value between zero and one. This reduces from one when a company has acquisition costs of the qualifying IP rights and/or R&D costs for connected subcontractors.

Read more on the Nexus R&D Fraction.

Can R&D tax credits and Patent Box work together?

Patent Box and R&D tax relief do work in conjunction with each other, helping incentivise the full innovation lifecycle for UK businesses. It’s a common misconception that you need to make a choice between Patent Box and R&D tax relief. By combining them, you actually get to incentivise and reward different stages of the innovation lifecycle. As the UK’s leading adviser on R&D tax relief, ForrestBrown are experienced in helping businesses combine the two regimes for maximum impact.

The key difference between the two reliefs is that R&D tax provides tax relief and / or a credit based on a business’s R&D spending, while Patent Box provides a lower effective tax rate on profits attributable to UK or certain European patents.

Find out more about combining R&D tax credits and Patent Box relief or see how we can help with claiming R&D tax relief.

Patent Box legislation and rules

The Patent Box scheme was introduced and formally phased in for accounting periods beginning on or after 1 April 2013. Its aim was to reward and encourage companies to invest in research and development activities and enhance the UK’s competitive edge globally by driving technology.

Changes to the regime

From 1 July 2016, changes were introduced to the Patent Box legislation, requiring a company claiming relief to demonstrate a ‘nexus’ between the R&D activities undertaken and the tax benefit derived from Patent Box. This introduced a nexus or link between the R&D expenditure and the Patent Box claim in each period. 

The R&D (‘nexus’) fraction was introduced, which dictates the proportion of the relevant IP Profits that can benefit from the lower effective CT rate. For accounting periods on or after 1 July 2021, this fraction is cumulative, meaning that it includes all days from 1 July 2016 to the end of the relevant accounting period. Prior to 1 July 2021, relevant accounting periods included data from 1 July 2013. For the purposes of the nexus fraction, a company can elect to go back 20 years.

These changes came about following a report from the OECD in October 2015, in which the regime was described as a ‘harmful tax practice’ as it allowed tax relief to claimants who did not undertake R&D within the UK. It noted that some international companies tried to exploit the incentive by locating their tax HQ within the UK, for potential tax evasion purposes.

There are some key details in the rules of – read our post on 8 Patent Box technical details you need to know.

How much is the Patent Box worth for my business

The Patent Box regime is an important incentive for companies with a true UK R&D base. The change in the CT rate from 1 April 2023 makes it a far more beneficial incentive with potential tax savings of up to 15%.

Being such a generous relief, it is surprising that more companies aren’t electing in and taking advantage of lower CT liabilities. This may be because it’s thought of as an overly complex piece of legislation. With a potential time bar of five years for missing a year’s claim, some companies (and their advisors) may deem it too difficult to forecast the benefit and stream profits.

Recent stats from HMRC suggest that large manufacturing companies are the main claimants but any and all businesses that hold patents (or exclusive licences over patents) should consider the relief.

Protecting your IP can offer an important revenue stream to your business and set you apart in the market from competitors. It allows you to offer your customers something new and different and build brand value.

ForrestBrown – Patent Box services

At ForrestBrown, we draw on decades of experience working with innovative businesses across various sectors to ensure their investment in IP is rewarded. Bringing together chartered tax advisers, lawyers and technical experts, our team will help you get the most out of your patents. Find out more about our Patent Box claim service or if you have any questions get in touch today.

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