Patent Box
Profiting From Patents? Use the Patent Box to Reduce your Corporation Tax
The value of IP on competitive edge is often underestimated by management teams, who may not be aware of the value of their IP rights. These rights can be what sets a company apart from its competitors and can also increase the value of a company when it comes to selling or seeking investment.
Since IP plays a crucial role in making a business competitive, it’s essential for companies to know which IP is valuable for future success, how best to protect this IP, and how to develop it and exploit it to best commercial effect.
Introduced in 2013, the Patent Box is a government initiative designed to encourage companies to keep and commercialise intellectual property in the UK. With over £1.47 billion in tax relief claimed in 2022/23 alone, it’s a golden opportunity to boost your bottom line and reinvest in your next big idea.
✅ It lets qualifying businesses pay just 10% corporation tax on profits from patented inventions—compared to the standard 25% rate.
✅ What’s more, once you have elected into the patent box scheme, you can claim this relief on profits over the life of the patent up to 20 years!
✅ The Patent Box is available not only for patent owners but also for those who hold an exclusive licence to a patent. So, even if you don’t have patents of your own you may still qualify.
Are you a UK-based company that pays UK Corporation Tax?
Do you hold intellectual property (IP) which generates profit for your company?
Then, good news! You could be entitled to pay a much lower rate of corporation tax on those profits derived from your patents.
You must be making a profit from commercially exploiting eligible patents or
other qualifying intellectual property rights such as…
Patents granted by the intellectual property offices UK IPO and EPO
Patents granted by the national intellectual property offices of the 13 EEA countries
Medicinal & botanical IP rights (e.g. supplementary protection certificates)
Exclusive licences for patented inventions developed, exploited and defended by the licensee
Patents acquired from another company, actively managed or developed by the acquiring company.
Your Patent Box relief claim, including the Patent Box Profit computations, can be made any time up to two years after the end of the accounting period in which the income and profits arose: either as part of your company’s tax return, or separately in writing. Once you have registered for the scheme you can then calculate a “patent box profit” annually for each patent you are commercialising.
✔ Patented products;
✔ Products incorporating one or more patented inventions;
✔ Bespoke parts used in the patented product(s);
✔ Licence fees, royalties or proceeds from the sale of the patent;
✔ Compensation and/ or damages resulting from patent infringements.
Following a calculation to remove various excluded costs from the patent profit, the resulting profit is then charged at 10% corporation tax rate.
Here’s a simple breakdown of the process:
You must formally opt in within two years after the end of the accounting period in which your IP profits were earned. This can be done via your Company Tax Return or in writing to HMRC – there’s no special wording needed.
Pinpoint qualifying profits, calculated using revenue streams from global sales of:
You’ll need to “stream” this income, allocating costs to calculate IP-specific profits in a “just and reasonable” way. Don’t worry – we can help with this! Click here to learn how streaming works under the UK Patent Box scheme.
3 | Calculate the R&D Fraction
Since July 2016, you must show a “nexus” between your R&D spending and the tax benefit. The R&D fraction (between 0 and 1) adjusts your claim based on in-house R&D versus acquired IP or subcontracted work. If you’ve done all the R&D yourself, your fraction is likely 1, maximising your benefit. Click here to understand how the R&D fraction and nexus principle impact your Patent Box claim.
Use HMRC’s formula to calculate a tax deduction that effectively reduces the tax on your qualifying IP profits to 10%. This deduction can lower your tax bill or increase losses to offset future profits.
ABC Ltd, a UK tech firm, spends £1 million on R&D to develop a patented software product, earning £5 million in profits over five years.
✅ They pay just 10% tax on those profits
✅ Saving £750,000 compared to the standard 25% rate
✅ That’s money back in their pocket for more innovation
With the UK corporation tax rate at 25% since April 2023, the Patent Box’s 10% rate offers a 15% saving — a 66% increase in value compared to when the standard rate was 19%.
Yet, with over 20,000 patent applications filed annually at the UK IPO, only 1,600 companies claimed relief in 2022/23.
That means thousands of businesses are leaving money on the table.
25%
UK corporation tax rate since April 2023
10%
The reduced corporation tax rate through Patent Box
15%
The tax savings on relevant patent Box profits
66%
The increase in value compared to when the standard rate was 19%
→ Review your R&D plans to establish whether any of your other products, services or processes could be patented to benefit from Patent Box. Make sure you conduct IP reviews at regular intervals.
→ Review your internal reporting and monitoring systems to ensure that they can collate the information required to calculate Patent Box profits, including tracking of R&D expenditure and sales income to patents and products. Look into Patent Box even if your patent is pending.
→ Companies with pending patent applications can also qualify retrospectively for the 10% rate once the patent is granted.
→ Consider fast tracking your patent to benefit from the Patent Box Scheme.
→ A patent with narrow scope may allow you to reap the full benefit of the Patent Box and may be more affordable and faster to obtain that a patent with a broad scope, where more interaction with a patent office is required.
→ If you are part of a group of companies, review group operational structures to ensure that IP and R&D activities are held in the correct companies to maximise Patent Box reliefs.
→ The idea behind Patent Box is simple enough, but companies can be put off pursuing a Patent Box claim due to the complex and often daunting way in which claims are prepared.
→ It’s a good idea to get advice from a specialist on things such as the impact of your existing R&D on the calculation of relevant Patent Box profit, on how to best manage tax benefits when combining R&D tax relief and Patent Box schemes, or on legislative changes & impact on current or future patent box claims.
→ Patent Box isn’t just for patent owners, the scheme is also open to anyone who holds an
exclusive licence to a patent, providing the company has undertaken qualifying development and active
management of the patented invention.
→ The Patent Box scheme can provide considerable tax savings to a company generating significant profits from IP related sales or license fees. However, when a company should elect into Patent Box is not always straightforward, depending on company profitability and future projected profits. Time this incorrectly and you could lose significant patent box relief.
