Patent Box

The Patent Box is a UK tax regime that allows companies to pay a reduced rate of 10% Corporation Tax on profits derived from qualifying patented inventions and certain other intellectual property rights. The regime is designed to encourage companies to commercialise patents and retain the resulting profits in the UK. It was introduced on 1 April 2013 and has been phased in over five years, reaching its full 10% rate from 1 April 2017. The Patent Box applies to accounting periods beginning on or after 1 April 2013 and is available to any company within the charge to UK Corporation Tax that owns or has exclusive rights in qualifying patents.

Qualifying Patents

To benefit from the Patent Box, the patent must have been granted by the UK Intellectual Property Office (UKIPO), the European Patent Office (EPO), or certain other national patent offices in the European Economic Area. Patents granted by the US Patent and Trademark Office (USPTO) — or any other non-EEA office — do not qualify on their own, although a US patent may qualify if a corresponding European patent (designating the UK) has also been granted. The patent must also be "qualifying" in the sense that the company, or a group company, has participated in the research and development (R&D) that created the patented invention. This is the "R&D precondition" — you cannot simply buy a patent and claim the box; you must have developed it or had it developed for you. Exclusive licensing rights can also qualify, provided the licensee has been actively involved in further development.

The 10% Rate and Profit Streaming

The reduced 10% rate applies to the qualifying residual profit derived from the patent, calculated using a formula that streams income from patent-related sales, royalties, and embedded IP income. The calculation involves several steps: first, compute the total profit from sales that involve the patent (the "relevant IP income"). Second, deduct routine profit (calculated as a fixed percentage of routine expenses) and a marketing assets return (where relevant). Third, cap the remaining profit by the R&D fraction — the proportion of qualifying R&D expenditure (incurred by the company or group) that was spent on developing the patented invention. The R&D fraction reduces the benefit if a significant amount of R&D was outsourced or if key development steps occurred outside the group. The resulting qualifying residual profit is subject to the 10% rate rather than the standard 25% Corporation Tax rate. Even for companies paying the small profits rate of 19%, the Patent Box still offers a meaningful saving.

Electing Into the Patent Box

You must make a formal election into the Patent Box regime. The election is made on your CT600 Corporation Tax return and must specify the first accounting period to which it applies. Once made, the election applies to all subsequent periods until withdrawn. You can elect into the Patent Box even if you have no qualifying patent profits in the first period — this may be useful if you expect qualifying IP income in the future. The election can be withdrawn at any time, but once withdrawn, you cannot re-elect for five years (unless HMRC agrees otherwise). Claims must be submitted within two years of the end of the accounting period.

Compliance and Documentation

The Patent Box requires detailed record-keeping. You must maintain a patent register listing all qualifying patents, a schedule of relevant IP income, calculations of the R&D fraction, details of routine deductions, and records of any exclusive licences. The calculation is notoriously complex, and many companies engage a patent tax specialist to prepare the claim. HMRC can open an enquiry into any Patent Box claim and will test the accuracy of the profit streaming, the R&D fraction, and the identification of qualifying patents. In recent years, HMRC has increased scrutiny of Patent Box claims, particularly where the R&D fraction is close to 1 (100%) or where the company has acquired patents or licences from related parties.

Interaction with R&D Relief

The R&D precondition requires the company to have been actively involved in the R&D that created the patented invention. Patent Box claims often go hand in hand with R&D Tax Relief claims. However, the benefits are not mutually exclusive — a company can claim R&D relief on the cost of developing the patent and then claim the 10% Patent Box rate on the resulting profits. The Patent Box regime is not available for accounting periods commencing before 1 April 2013 and cannot be used where the company has made an election under the previous "patent income" regime. It is also subject to the OECD's modified nexus approach, which requires that the proportion of qualifying R&D expenditure matches the income benefiting from the box rate — this is the basis of the R&D fraction in the calculation.

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