Patent Box

Your company may qualify for Patent Box if it is subject to UK Corporation Tax, owns or exclusively licenses qualifying patent rights, has undertaken qualifying development in relation to the patented invention, and generates relevant income from exploiting those rights. For companies that are members of a group, additional active ownership requirements can apply. Importantly, simply owning a patent is not enough. There needs to be an appropriate connection between the company, the development activity and the profits generated from the qualifying intellectual property.

Potentially, particularly where a company generates significant profits from products, processes or services connected with qualifying patents. Patent Box effectively applies a 10% Corporation Tax rate to qualifying Patent Box profits, compared with the main Corporation Tax rate of 25% for companies within that rate. The benefit therefore has the potential to be substantial. Whether Patent Box is worthwhile will depend on factors including the amount of relevant IP income, profitability, R&D expenditure, the nexus fraction and the administrative work required to calculate and support the claim.

The potential saving depends on the amount of profit attributable to qualifying intellectual property. Patent Box provides an effective 10% Corporation Tax rate on qualifying Patent Box profits, so companies paying Corporation Tax at the 25% main rate can potentially achieve a significant reduction in tax on those profits. However, the calculation is more complex than simply applying a 15 percentage-point saving to all profits associated with a patented product. Relevant IP income must be identified and adjusted, and the nexus fraction can restrict the benefit. A Patent Box calculation or opportunity assessment can help establish the likely value before making an election.

A company must generally elect into Patent Box within two years after the end of the accounting period in which the relevant profits and income arose. It is sensible to consider the election earlier, particularly where the company expects to generate relevant IP profits or has several patents, products or income streams to track.

Where a qualifying patent application is subsequently granted, special rules may allow qualifying profits arising between the application and grant dates to be brought into the Patent Box calculation. This is not automatic: the relevant conditions, elections, time limits and tracking requirements must be satisfied.

The treatment of pre-grant profits is generally dealt with in the accounting period in which the patent is granted, rather than by treating the profits as automatically receiving the reduced rate in each earlier period. Companies with pending applications should therefore obtain advice before assuming that pre-grant profits will qualify.

Potentially, but software itself does not automatically qualify. Computer programs "as such" are not generally patentable in the UK or through the European Patent Office. However, a software-based invention that provides a patentable technical solution to a technical problem can potentially be patented. Where a company holds or exclusively licenses a qualifying patent covering the software-based invention, income associated with exploiting that patented technology may potentially fall within Patent Box, subject to the other conditions. This makes the scope and wording of the underlying patent particularly important.

No. A company can potentially qualify if it owns the qualifying patent or holds an appropriate exclusive licence over it. The company must also satisfy the qualifying development requirements and the other Patent Box conditions.

An exclusive licence needs to provide genuine and substantial rights to exploit the patented invention. A licence described commercially as “exclusive” may not be sufficient if it provides only exclusive distribution or resale rights without the required rights over the patented technology.

Group structures can add further complexity where one company undertakes the development, another owns or licenses the patent and a third exploits the resulting product. These arrangements should be reviewed carefully before making a Patent Box claim.

Yes, provided the licence meets the Patent Box requirements for exclusivity. Broadly, the company must have genuine and substantial exclusive rights to exploit the patented invention, rather than simply an exclusive distribution or resale arrangement. Exclusivity can potentially relate to a particular territory or field of use, but the detailed terms of the agreement matter. Rights concerning enforcement of the patent are also relevant. Licence agreements should therefore be reviewed carefully rather than assuming that an agreement described commercially as "exclusive" automatically qualifies for Patent Box.

R&D tax relief and Patent Box can complement one another. R&D tax relief supports the cost of undertaking qualifying research and development, while Patent Box can reduce the Corporation Tax payable on qualifying profits generated from resulting patented innovations. A company may therefore benefit from R&D tax relief during development and Patent Box as the resulting technology becomes commercially successful. R&D activity is also important within the Patent Box calculation because the nexus rules link the level of Patent Box benefit to the company's qualifying R&D expenditure associated with the relevant IP.

The nexus fraction is designed to ensure that Patent Box benefits are linked to the R&D activity undertaken by the company in developing the qualifying intellectual property. Broadly, it compares qualifying R&D expenditure with the company's overall expenditure on developing or acquiring the relevant IP. Where the company undertakes its own R&D, or uses unrelated parties to do so, the fraction may be high and Patent Box benefits may be unrestricted. Significant expenditure on acquiring IP or outsourcing R&D to connected parties can reduce the proportion of relevant IP profits eligible for the Patent Box benefit.

There is no requirement to use a specialist, and your accountant or tax adviser may already have the necessary expertise. However, Patent Box calculations can become complex, particularly where a business has multiple patents, several product lines, embedded patented technology, international R&D, acquired IP or connected-party arrangements. Specialist support can help establish eligibility, identify relevant IP income, calculate the nexus fraction and determine the appropriate Patent Box deduction. It can also be valuable before a patent is granted, helping the business understand the potential tax value of its IP and put appropriate record-keeping arrangements in place.