Patent Box In Detail

What is it and how does it work?

The Patent Box scheme is a UK tax incentive designed to support innovation by allowing companies to apply a reduced rate of Corporation Tax (10%) to profits earned from patented inventions. By opting into the scheme, businesses can significantly lower their tax liability on qualifying intellectual property income, compared to the standard 25% rate. This initiative encourages companies to develop and retain IP within the UK, strengthening the country’s position as a global leader in innovation.

Brief history

The UK introduced the Patent Box scheme in April 2013 to encourage innovation by offering a 10% Corporation Tax rate on profits from patented products. In 2016, the UK introduced changes to ensure that tax relief was more closely tied to R&D activities conducted within the country, addressing concerns from the OECD. These reforms included new rules for calculating profits and tracking R&D expenditure. Companies operating under the previous rules had until June 2021 to transition. Since its launch, the scheme has grown in popularity, especially among large manufacturers, with significant amounts claimed in tax relief each year.

Who is eligible to benefit from the UK Patent Box scheme?

The Patent Box scheme is open to companies in any industry so long as that company is subject to UK Corporation Tax, owns or exclusively licenses qualifying patents and earns profits from those patents.

How do R&D tax relief and the Patent Box scheme work together?

R&D tax relief and the Patent Box are two separate schemes, but they can be used together to maximise tax benefits for innovative companies.

R&D tax relief helps reduce costs by offering tax relief on qualifying R&D expenditure, covering a portion of the money spent on research and development. Once a company develops a patented product or process through these R&D activities, they can then use Patent Box to pay a lower tax rate on profits derived from that intellectual property.

Stages of the Patent Box calculation process:

Stage 1: Identify relevant IP income:

The first step is to separate trade income, excluding finance income, into a ‘relevant IP income’ stream and a ‘standard income stream’.

Stage 2: Deduct relevant IP costs:

Identify the costs that relate to the generation of the relevant IP income and deduct these from the income to identify the profit relating to the patented products or processes.

Stage 3: Deduct routine profits:

Subtract a routine return – profits the business would likely earn even without the patented IP. This ensures only profits that result from the patent qualify.

Stage 4: Remove marketing-related profits:

Exclude any profits from marketing or branding activities, as these do not stem directly from the patent. Items to be considered here include brand names and logos.

Stage 5: Apply the R&D fraction:

This step adjusts for the amount of R&D expenditure the company funded when developing the patented invention or process.

The result of this process is the “relevant IP profit,” which can then be taxed at the lower Patent Box rate, potentially reducing Corporation Tax on these profits to 10%.

Does the patent need to be granted, or can Patent Box apply to pending patents?

To obtain the Patent Box benefit, your patent must have been granted. However, there is an option to include profits generated before the grant of the patent, provided the company had already elected into the regime. This pre-grant period can extend up to six years prior to the patent being granted, as long as the election was in place during that time.

What can relevant IP include?

Relevant IP income can include:

• Income from the sale of patent products. This includes entire products, components or parts patented, or products made from a patented process.
• Income from licensing out IP to third  parties, including“notional royalties”.
• Sale or disposal of patent rights.
• Compensation or damages received from legal action for patent infringement. 

It does not include any income related to the financing activity.

Does it matter where my patent was granted?

Only patents granted in the UK or EU may qualify for relief under the UK Patent Box scheme. Patents granted in the USA, for example, are not eligible for relief.

When can I elect into the scheme?

Businesses must formally elect into the Patent Box scheme. Election is completed as part of the Corporation Tax Self-Assessment (CTSA) process. Under the CTSA framework, you have 2 years from the end of the relevant accounting period to elect in. You can elect in whilst the patent is pending.

Importantly,once you have elected into the scheme you have to claim every year. You are able to revoke an election into the scheme however if you do so, you are unable to make a new election for a five year period.

Is it a hard process to get a patent?

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How narrow can a patent be?

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