Patent Income – Defining profits from IP for Patent Box

The Patent Box is a program offered by HMRC to provide a tax incentive for businesses. It aims to encourage innovation and the development of new technologies by lowering the Corporation Tax on profits generated from patented products or processes.

Companies that qualify can choose to pay a lower corporation tax rate of 10% on profits earned from their patented inventions, compared to the main Corporation Tax rate in the UK (currently 25%).

In order to qualify, companies need to show that a significant portion of the profits from their patents (or patent income) comes from their own R&D activities.

What is “patent income”?

When a company is making money from patented products, processes or services, it's very important to note that not all a company's profits come from its patented ideas. To classify profits as intellectual property (IP) income, they must arise from at least one of the following:

• Direct sales of patented products, including the product itself and products that use the patented invention.
• Licensing the rights to use the patent to others.
• Selling the patent rights entirely
• Winning compensation for patent infringement (when someone uses your invention without permission).
• Receiving damages, insurance payouts, or other compensation related to your patent rights.

This applies to both manufacturing and service companies. For example, if your company uses a patented process to make a product or offers a service that relies on a patented tool, the income generated can potentially qualify for tax benefits.

Identifying profits that can be included

The Patent Box is a regime that allows companies to pay a lower tax rate on profits from their patents. To take advantage of it, you'll need to separate your patent income from other income sources.

Opting into the patent box regime

If you'd like to benefit from the reduced tax rate offered by the Patent Box regime, your company can opt into it within two years of the end of the accounting period when the relevant income arises. You can make this election through your company tax return or a separate written statement.

It is essential, however, that you understand whether your company qualifies. HMRC has recently reported that lots of eligible companies are not claiming Patent Box tax relief. So it may be highly beneficial to check. You can check your eligibility below.