Patent Box

The Patent Box is a tax incentive program in the UK designed to encourage innovation and the development of Intellectual Property (IP). This initiative was introduced in 2013 and aims to promote research and development (R&D) activities, attract high-value industries, and enhance the competitiveness of the UK in the world.

The Patent Box relief enables qualifying companies to benefit from a lower their effective Corporation Tax rate of 10% on profits derived from the commercial exploitation of their patents. The reduced rate is only applied to the relevant IP profits.

Who Qualifies For Patent Box?

In order to will qualify for the Patent Box relief, a business needs to be a UK-registered company liable of corporation tax and own patent licences in IP rights, or exclusive licences in the rights to those patents. 

It also must have undertaken qualifying research and development on the underlying IP by making a significant contribution to either:

• the creation or development of the patented invention, or;
• a product incorporating the patented invention.

If a company holds licenses to use someone else’s technology, it may still benefit from the Patent Box relief if certain conditions are met. It must have:

•  rights to develop, exploit and defend rights in the patented invention;
•  one or more rights to the exclusion of all other persons (including the licensor);
•  rights to manufacture or sell within at least an entire national territory.

In addition, the licensee must be able to either bring infringement proceedings to defend its rights or be entitled to most of the damages awarded in successful proceedings relating to those rights.

Patents that are eligible for the Patent Box scheme include those granted by the UK Intellectual Property Office.

How Does Patent Box Work?

Under the Patent Box relief, the reduced rate of Corporation Tax is applied to the relevant IP profits generated by the company. After identifying these profits, a specific formula is used to compute the Patent Box deduction, which is then applied to the tax-adjusted trading profits.

The calculations set out in the legislation are intricate and involve multiple steps but can be summarised into the following three key stages:

1. Calculation of the qualifying trading income generated from the exploitation of qualifying patents;
2. Removal of a routine return/profit element which reflects the notional profits the company would have achieved without the use of patented technology;
3. Remove of its marketing assets return figure.

Companies must elect to benefit from the reduced Corporation Tax rate that applies to the Patent Box within two years after the end of the accounting period in which the relevant profits and income arose. You can do this in the computation accompanying your Company Tax Return.

Once elected, you will remain in the Patent Box until you decide to opt-out. If a company opts out, it will not be permitted to elect back in for five years.

How We Work

Led by Fiona Cross, our experts will guide your business through this complex process to maximise your relief. We offer:

• A feasibility study to evaluate the benefits of joining the Patent Box scheme.
•  Advice on optimal timing for election.
•  Assistance with detailed relief calculations, including benchmark for relevant marketing royalty.