Patent box support

The UK’s patent box regime is a generous and often underclaimed relief introduced to incentivise companies to retain and commercialise existing patents and develop new innovative patented products.
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Patent box relief sees profits generated from qualifying patents taxed at a preferential rate of 10% rather than the standard corporation tax rate.

The relief applies to UK business profits generated from the worldwide sales of patented products, even if the patent only applies to a small part of the total product. It can also apply where patents have been acquired, but with some additional conditions, and the relief may be restricted.

Patent box eligibility

The patent box relief is available for UK companies exploiting qualifying UK or European patents; patents only qualify if they are granted by the UK Intellectual Property Office, the European Patent Office, or specified EEA countries.

The regime can apply to existing, newly granted or acquired patents, but the UK company must have had, or intend to have, significant involvement in developing the patented invention or a product incorporating the patented item.

The company must make an election into the patent box regime within two years after the end of the relevant accounting period in which relief is to be claimed.

Patent box calculation

An additional deduction is claimed in the company’s tax computation to give an effective tax rate on qualifying intellectual property profits of 10%. This additional deduction follows a multi-step calculation to determine the amount available for patent box relief.

The calculation aims to stream the business’s income and identify the profits attributable to the patent sales. This includes adjustments for other areas of the business, such as other product sales, marketing, staff and premises expenditure that might ordinarily drive profits.

The patent box rules were amended on 1 July 2016, although grandfathering provisions applied until 30 June 2021, to add the requirement for a link between the patent on which the relief is claimed and the company carrying out the associated research and development activity. This limits the benefits for companies that have outsourced R&D to related parties or acquired the IP.

How we can help

The eligibility criteria and calculation of the patent box relief may be complex, but the savings can be substantial. It is worthwhile undertaking an initial benefits analysis as soon as possible to maximise the potential benefits of the regime.

We can help review your patents, pending patents and development activities to determine whether or not they fall within the patent box regime and advise you on how to claim patent box relief in your tax returns.

Once eligibility is confirmed, we can assist with the elections, calculations and ongoing monitoring. Typically, it is worth investing in more detailed upfront work to establish the basis of the calculations. Then, the work of calculating the benefit in the following years is usually much more manageable.

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Frequently asked questions about Patent Box

The regime is available for UK companies exploiting qualifying UK or European patents; patents only qualify if granted by the UK Intellectual Property Office, the European Patent Office, or by specified EEA countries. This will require the company to own the patent outright or have an exclusive licence over a patent to exploit it.

The regime can apply to existing, newly granted or acquired patents, but the UK company must have had, or intend to have, significant involvement in developing the patented invention or a product incorporating the patented item.

Patent box relief enables businesses to benefit from a preferential 10% tax rate on profits generated from qualifying patents rather than the standard corporation tax rate. The company must meet certain eligibility criteria and calculate the benefit through a detailed calculation.

The relief applies to UK business profits generated from the worldwide sales of patented products, even if the patent only applies to a small part of the total product. It can also apply where patents have been acquired, but there are some additional conditions, and the relief may be restricted.

A company can elect into the regime before a patent is granted to effectively claim tax relief on qualifying profits generated in the period from filing the patent application to the date of the grant. However, the accumulated relief is claimed in the tax return for the year the patent is granted.

The development condition requires the UK company to have had, or intend to have, a significant involvement in developing the patented invention or a product incorporating the patented item. Essentially, the benefit is reduced in line with the amount of intellectual property purchased or research and development activity outsourced by the company.

If this development condition is only met because of the activities of another group company, the claimant company must also actively manage its portfolio of qualifying patent rights. This may include activities such as protecting the patent, researching alternative applications for the patent or licensing others to use the patent.

The regime’s benefit is that taxable profits are reduced for income derived from the qualifying patents. Where a business has elected into the regime and makes a loss from its qualifying patents, then these losses are carried forward to offset future patent box profits from qualifying patents.

Typically, businesses do not elect into the regime until they are profiting from the qualifying patents, particularly given the up-front administration involved. However, care is needed to ensure the potential value of electing into the regime isn’t lost by delaying until profits are made. In some situations it can be preferential to elect in during the earlier loss-making period.

Patent box rules were amended on 1 July 2016, although grandfathering provisions applied until 30 June 2021. The main change was to add a requirement for a link between the patent on which the relief is claimed and the company carrying out the research and development. This limits the benefits for companies that have outsourced R&D to related parties or acquired the IP. The company must retain a ”nexus” with the original development, and the benefit is proportionally reduced as the nexus is diluted. Calculating the R&D fraction involves tracking the R&D expenditure annually on a cumulative basis for up to 20 years and aligning this to each product or licence.

The patent box benefit is received as an additional deduction in the corporation tax computation. This is calculated via several steps:

  • Identify relevant IP (intellectual property) income – profits attributable to income arising from exploiting patented inventions
  • Remove a routine profit – an adjustment that is made to reflect the fact that a business would expect to earn a profit even if it had no access to patented technology or intellectual property
  • Remove the marketing asset return – an adjustment for profit associated with other intangible assets, such as brand or other marketing assets
  • Apply an R&D fraction – to limit the benefit by reference to the proportion of R&D the business itself undertook in developing the qualifying IP right

The changes introduced from 30 June 2016 became mandatory from 1 July 2021. All businesses must now use the streaming method to calculate the benefit. This requires a full analysis of the business’s income and expenditure so that income and expenses are split appropriately between patented and non-patented sales.

Calculating the patent box benefit can be daunting, but S&W’s specialists can work with you to set this up. We can also help you amend your internal systems to capture this data in real-time moving forward.