Patent Box

What is Patent Box?

The Patent Box regime is a UK Government legislated tax deduction for businesses deriving profits from the Intellectual Property 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.

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.

Patent Box explained

Although a significant relief for any UK business, it remains one of the lesser-known tax incentives. 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 – this is where using an R&D tax specialist will aid the process of further tax savings.

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

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

Would my business qualify for Patent Box?

Much like the R&D tax credit regulations, there are a number of qualifying criteria a business must meet in order to claim the relief. This includes:
1. Being liable to UK corporation tax
2. Making profits from the commercialisation of patented inventions
3. Owning or having an exclusive right on patents
4. Undertaking the R&D qualifying development of the patent

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 which income streams count as relevant PB income – there are several streams of income as covered below.

Qualifying income for UK Patent Box must relate to selling patented products. It can include income from the following:
1. Products incorporating the patented invention e.g. bespoke spare parts
2. Licensing out patent rights
3. Selling patented rights
4. Infringement income and damages/insurance or other compensation related to patent rights

What is the tax saving?

Many businesses doing R&D work then go on to think about how much is the Patent Box worth for their 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% (having brought down the corporation tax rate from 25% down to 10% on those patented items).

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.

HMRC stats 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.

Patent Box example calculation

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

YE 31 December 2024 - Relevant IP profits £1,000,000
Patent box deduction (25%-10%)/25%) x £1,000,000 = £600,000
CT saving at 25% CT rate = £150,000