Patent Box

What is Patent Box?

The Patent Box is a valuable form of tax relief available to UK companies that pay corporation tax on certain profits that derive from intellectual property (IP).

Its purpose is to encourage research and development, and help companies protect their IP. It is also intended to encourage companies to register patents in the UK rather than elsewhere. It forms part of the government’s ambition to increase the number of skilled jobs in the UK and boost the country’s science and technology sectors.

Typically businesses that are eligible for the Patent Box are active in aerospace and aviation, agritech, energy and the environment, engineering, IT, life sciences, manufacturing, pharmaceuticals or the security and defence sectors.

How the Patent Box works

Eligible profits are taxed at 10% rather than the current 19% rate, which is rising to 25% in April for larger companies.

Companies that make a profit from patents they own or exclusively license, and have undertaken qualifying development on those patents, should apply to the Patent Box scheme.

Eligible profits include those deriving from the sale of patented products or those that incorporate patented products, and from licensing patents to others and from using patented processes under an exclusive licence.

Applications for tax relief under the scheme are made on the company’s tax return, either the original one or a later amended one. It is advisable to show HMRC how the claim for relief was calculated.  

A claim can only be submitted within two years of the end of the accounting period in which the profits or income from the patent was generated.

The UK Intellectual Property Office is not the only source of qualifying patents. They can also be issued by the appropriate IP authorities in Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia and Sweden.

The scheme excludes patents granted by France, Italy, Spain, Japan and the United States.

Calculating relief

A number of steps are required before a figure can be obtained that represents eligible profits. The process requires expertise and is best done with an experienced tax professional.

First, the part of a company’s profits that are eligible must be identified. This is done by means of a streaming methodology that apportions a company’s expenses.

Second, a routine profit should be deducted, which amounts to a notional 10% return on some operating expenses.

Third, some part of a company’s profits are deemed to come from its brand and market position and these should also be taken off.

Fourth, multiply by the R&D fraction – this applies when a company did not undertake all the relevant R&D itself.

Fifth, whatever sum is left is taxed at the reduced rate of 10%.

Conclusion

Patent Box is a relatively complex form of tax relief to claim because it requires a financial justification (eligible profits) and a technical justification (genuine innovation). Both of these have a subjective element so expert advice is required to ensure that the value of a claim is maximised.