Patent Box Tax Relief – Examples

The UK Patent Box provides a tax incentive for qualifying businesses, allowing them to benefit from a reduced Corporation Tax rate of 10% on profits earned from their patented products or services.

HMRC has recently reported that many eligible companies are not claiming Patent Box tax relief. This is a big opportunity being missed, perhaps because some of these companies aren’t aware of how it works and lack real examples for comparison.

Here are three real-life Patent Box case studies from innovative companies that the Radius team has worked with on Patent Box claims.

Example 1: A manufacturing company saves £525k through pre-grant relief

A claim for a manufacturing company spanning two accounting periods generated a corporation tax saving of £525k.

Due to the company's 31 March year-end and the patent granting at the end of March 2024, the claim was based entirely on “pre-grant relief” based on IP-related sales from the date the patent was applied for to the date the patent was granted.

As this spans across 2 accounting periods, the patent box legislation allowed the company to claim both years' relief as one figure in the 31 March 2024 tax return.

This was a fantastic tax saving for the company and demonstrates the full benefit of the patent box regime, allowing you to accrue relief from the date the patent is applied for and claim once the patent is granted.

Example 2: Printing machines save £233k

A claim for a printing machine manufacturer that has patents covering 3 different machines and sources of IP-related income saved them £233k in Corporation Tax.

Because the company exceeded the “small claims treatment” limit for the Patent box, which is where the qualifying residual profit (QRP) is <£1m*, we had to calculate the profit arising from the sales stream related to each individual patent, to arrive at the total patent box deduction.

*Where QRP is <£1m, then a company can elect for global streaming of its income received from several patent-related sales streams, meaning it is all pulled together as one single stream of income. This can make it easier to calculate and less burdensome for a company to track sales or the expenses and overheads incurred in making the products or processes covered by the patent.

Example 3: Patenting a process and saving circa £60k a year

It’s not just companies with a product they patent and sell that can benefit from the patent box regime. Where a company patents a process, they can also qualify. We conduct several claims involving a patented process, and for one of our clients, it generates circa £60k corporation tax savings annually.

Generally, income received from a “process” is treated as a “notional royalty” for the patent box and calculated as a percentage of the IP-derived income generated by the process.

An example is a company that manufactures widgets and holds a patent for a new process rather than a patent covering the actual widget.

IP-derived income

The widget's sales can’t be included as sales income for the purpose of the patent box. Instead, the company would need to calculate the income received from each widget before and after the patented process is first used to manufacture each widget to identify the additional income received post-the patented process. This is called IP-derived income and would be the amount that went into the claim.

In these cases, you may also need to consider transfer pricing principles and means that the company would need to consider (hypothetically) what they would pay a third party if they had licensed the patented machinery part at arm’s length in order to exploit that patent in the period. However, if the company qualifies for small claims treatment*, the legislation allows them to treat 75% of the derived income as qualifying income for the purpose of the calculation – thus removing the need to follow transfer pricing principles.

*Small claims treatment is where qualifying residual profit does not exceed £1m, or where, in the previous 4 years, the company has not calculated its profits without making the relevant small claims election when it qualified to do so. See the hyperlink for further information.