What is the Patent Box - How does it work?

The Patent Box is a tax incentive program offered by HMRC in the United Kingdom.

The purpose of the Patent Box is to encourage companies to invest in the development of innovative new technologies by offering a reduced rate of Corporation Tax on the profits that patented products or processes generate

How much is the reduced tax rate under the Patent Box?

Patent Box allows eligible companies to apply a lower rate of Corporation Tax, currently 10%, to the profits derived from patented income.

Patent Box is often combined with the UK government’s generous R&D tax relief programme as a way to incentivise innovative investment by businesses.

Which companies qualify for Patent Box?

The Patent Box scheme is for businesses that generate profit from patented products or processes. This means that a business must meet strict qualifying criteria to be able to make a claim.

• The company must be subject to Corporation Tax

• It must own or exclusively licence qualifying IP

• The company must hold a qualifying patent from the UK Intellectual Property Office or the European Patent Office

• The company must prove that a significant proportion of the profits arising from its patented products or services are a result of its own R&D activities.

• The company must keep records and provide HMRC with information about the patents and the profits they help generate. 

Further conditions will also need to be considered and should be explored in detail with a Patent Box specialist.

Can loss-making companies benefit from Patent Box?

Patent Box allows companies to apply a lower rate of Corporation Tax to profits from patented products, but what if there isn’t a profit?

If a company is currently loss-making, it can still benefit from the Patent Box scheme if it expects to generate profits in the future. Sometimes a company might even make a Patent Box profit but an overall Tax loss, the effect would be to create a larger trading loss that could be relieved against future profits or carried back.

If you have a Patent Box loss then you might want to hold off making a claim until there is a Patent Box profit. This is because once you make a claim, you have effectively elected into the scheme, and although you can also elect out again, you are not permitted to claim again for 5 years. Talking to a specialist advisor is crucial to help you understand how this works in practice.

The reduced Corporation Tax rate on eligible profits can though provide an incentive to keep investing in R&D and bring innovative products to market.

What is the qualifying IP for Patent Box?

Qualifying IP includes patents granted by the UK Intellectual Property Office (IPO), by the European Patent Office and by certain, but not all, European countries.

It also includes plant breeders’ rights and certain cases where a patent would have been granted if not for the fact that the application contains information prejudicial to national security.

The company must also own or exclusively licence the qualifying IP.

Important Patent Box considerations

The rules and regulations surrounding Patent Box can be complex, making it difficult for companies to understand and comply with the requirements. This can result in errors and potential penalties.9

• Ensure you comply with the Patent Box eligibility criteria.

• Ensure you understand the definitions of terms like "patented invention" and "qualifying IP income." These can be open to interpretation, which can complicate the process.

• There may be a risk of double taxation involved, as the same income may be taxed in multiple countries. 

We therefore strongly recommend consulting with a qualified advisor when applying.