What is The Patent Box?

What the Patent Box is (and what it isn’t)‍

Patent Box applies a lower Corporation Tax rate to the profit you earn from qualifying patented innovations. You work out how much of your profit comes from selling patented (or patent-enabled) products and/or licensing the patent, then apply the Patent Box calculation to that portion. The result is an effective 10% Corporation Tax rate on those qualifying profits, while the rest of your profits are taxed as normal.

What it isn’t: it’s not a grant, not an “extra” R&D tax credit, and not a reward simply for owning a patent. You only get benefit where you’re actually making profits from exploiting the protected invention (for example through product sales or royalties), and you still need to show you meet the eligibility conditions and have computed the benefit correctly.

‍Who can claim

To benefit, your company must be liable to pay UK Corporation Tax and be a trading company making profit from exploiting qualifying IP rights. You must also own the qualifying right or hold it under an exclusive licence, and you must have undertaken qualifying development on the invention (or on a product that incorporates it).  

Ownership vs exclusive licence

Ownership is straightforward: the company holds the granted patent (or other qualifying right). An exclusive licence can also qualify, but it must be genuinely exclusive. In practice, HMRC expects the licensee to have the rights to develop and exploit the patent and to protect it, and the exclusivity generally needs to cover an entire national territory (partial territorial rights usually won’t qualify).

The development condition

The regime is meant to reward companies that genuinely contribute to developing the patented invention, not those that simply acquire IP and collect income. HMRC’s guidance describes this as needing to make a significant contribution to creating or developing the patented invention, or a product that incorporates it. If you’re part of a group, there are additional expectations around how the IP is managed (see active ownership below).  

Groups and “active ownership”

If your company is in a group, eligibility isn’t just about who’s named on the patent certificate. HMRC expects the claimant to actively own the patents and take a significant role in managing the portfolio of eligible patents. In practice, this is where governance, decision-making and documentation start to matter just as much as the patent itself.  

What counts as qualifying IP and qualifying income

Qualifying IP rights

Most claims are based on patents granted by the UK Intellectual Property Office or the European Patent Office (and certain EEA patents as set out in HMRC guidance). But Patent Box can also apply to specific rights linked to medicinal and botanic innovation, including supplementary protection certificates and certain marketing/data protection rights, as reflected in HMRC’s technical material.  

Qualifying income: it’s broader than many people think

Patent Box isn’t limited to “royalties only”. It can include income from selling qualifying items, licensing income, and other categories of IP-derived income set out in the legislation.

Sales income (including products that incorporate the patented invention)

‍HMRC’s manual explains that “head 1” includes sales of the patented item and also sales of items incorporating that patented item. Importantly, it can cover worldwide sales by the company of that item, even if the patent protection itself only applies in certain jurisdictions.  

Licensing income and royalties

‍HMRC’s manual “head 2” covers licence fees and royalties in respect of qualifying items or processes. It also highlights that royalties can still be relevant in scenarios involving overseas patents, provided they relate to the same item or process specified in the qualifying patent.

Other IP-derived income‍

There are situations where income arises from exploiting the right but doesn’t sit neatly within the main heads of income (for example, certain services or leasing/renting items incorporating qualifying IP). HMRC’s manual discusses these categories and why they need careful handling.  

How the 10% benefit rate works in practice

Patent Box isn’t a “tick the box and get 10% Corporation Tax” exercise. The 10% rate only applies to the part of your profit that comes from qualifying patented innovations, not to your whole company profit.

To get there, you work through a calculation that includes:

• Identifying the income linked to your qualifying patents (such as patented product sales or patent royalties)
• Working out the profit that relates to that income
• Applying the Patent Box rules and adjustments so that that qualifying slice of profit is effectively taxed at 10%

In some cases, HMRC expects you to “stream” your figures, meaning you separate patented income and profits from non-patented income and profits to make sure the benefit is calculated on the right amounts.

Here’s the practical workflow most finance teams follow:

1) Confirm you qualify for the period

Start by confirming the company meets the basic eligibility conditions in the accounting period: trading company, liable to Corporation Tax, owns or exclusively licenses qualifying IP, and has undertaken qualifying development. For groups, you’ll also need to be comfortable that the active ownership condition is met and explainable.  

2) Identify relevant income streams tied to the qualifying IP

Map your revenue to the qualifying IP rights: product lines, licence agreements, royalty streams, and any other income that’s directly connected to exploiting the patented invention. This is where companies often underestimate scope (or worse, include income that doesn’t really belong), so a clear mapping is essential. HMRC explicitly recommends keeping a clear record of qualifying IP held (including grant and expiry dates) and using that to identify relevant income streams.  

3) Work out the profit linked to your patent income

Once you’ve identified the income that relates to your qualifying patents, the next step is to work out how much profit that income generates. In practice, this means separating the sales and costs for your patented products (or patent-related royalties) from the rest of the business, so you’re only applying the Patent Box benefit to the right slice of profit.

For some companies, that separation is fairly straightforward because patented income sits in a clear product line. For others, patented and non-patented products are sold together, or costs are shared across multiple projects. In those cases you may need to “stream” your figures, essentially creating a separate mini profit-and-loss view for the patented product, product family, or IP stream, using a sensible, evidence-backed method. Use a clear approach that you can explain and support if asked.

4) Apply the R&D fraction (this can reduce the benefit)

For some companies, Patent Box doesn’t automatically apply to 100% of the profit you’ve identified. If you elected into Patent Box after 30 June 2016 (or have newer patents), the benefit can be restricted by the R&D fraction (sometimes called the “nexus” adjustment), which which limits the benefit to reflect how much of the underlying R&D was actually carried out by your company, rather than bought in or acquired.

In plain terms: the more of the R&D you did yourself (or directly funded, the more of the profit can qualify for the 10% effective rate. If a large part of the IP was acquired, or the development work was mainly done by others, the R&D fraction can reduce the share of profit that gets Patent Box treatment.

5) Add the Patent Box deduction to your Corporation Tax return

Once you’ve completed the calculation, you include the Patent Box deduction in your Corporation Tax computation. This deduction reduces the tax due so that the qualifying part of your profit is effectively taxed at 10%. HMRC provides calculation examples and decision tools, and also sets expectations on the level of supporting information that helps them understand how you arrived at the figure.  

A simple worked example calculating the Patent Box benefit (illustrative only)

A company sells a product range and makes £1,000,000 trading profit for the year. After mapping income and costs, it calculates that £300,000 of that profit relates to a product that incorporates a qualifying patent (this is the “Patent Box profit”). The remaining £700,000 is non-qualifying profit.

Assume the company’s normal Corporation Tax rate is 25%. Without Patent Box, tax on the full £1,000,000 would be £250,000.

With Patent Box, the £300,000 qualifying profit is effectively taxed at 10% (so £30,000 of tax on that slice), while the £700,000 non-qualifying profit is taxed at 25% (so £175,000).

Total tax becomes £205,000 (a saving of £45,000 compared with £250,000).

If the R&D fraction reduces the benefit

If the R&D fraction is 0.6, then only 60% of the £300,000 (i.e. £180,000) gets the 10% effective rate. The remaining £120,000 is taxed at the normal rate.

That gives an effective blended rate on the £300,000 of (60% × 10%) + (40% × 25%) = 16%, rather than 10%.

‍Patent Box timings

When you must elect into Patent Box

You only get Patent Box if you actively elect into it. It isn’t automatic.

In most cases, you need to make the election within 2 years of the end of the accounting period you want to claim for (i.e. when the relevant income and profits arose). You can do this either:

• in the tax computation submitted with your Company Tax Return, or
• by sending a clear written election to HMRC.

A helpful way to think about it: treat the election like a deadline you diarise early, not something you leave until the Corporation Tax return is due. The time limit can effectively link back to how long you have to amend the relevant return, so leaving it late creates unnecessary risk.

Can you benefit from Patent Box while a patent is pending?

No, you generally can’t apply Patent Box until the patent is granted.

However, there’s an important upside: the rules allow an additional benefit for profits that arose before grant, once the patent is granted as you’ve elected into the regime. The key point is that this benefit is typically brought into the year the patent is granted. You can't go back and amend earlier years to apply the 10% rate.

Practical takeaway: if you have a product that’s selling well while the patent is pending, don’t wait until it's granted to think about Patent Box. Keep track of which sales relate to the innovation and make sure you don’t miss the election window, so the year-of-grant claim is straightforward.

When does the Patent Box benefit start?

Patent Box has been fully in effect since the phased introduction ended (it was introduced in stages from 2013 up to 2017). That doesn’t mean every company gets the full 10% benefit because:

• you may need to separate patented vs non-patented income and costs (“streaming”), and/or;
• the R&D fraction may reduce how much profit qualifies

So the benefit starts when the patent is granted and you have qualifying profits, but the actual value depends on your facts, your records, and how much of the development you carried out yourself.

‍Common misconceptions of the Patent Box

“We have a patent, so we automatically get 10% Corporation Tax.”

Having a patent doesn’t automatically change your tax rate. Patent Box can only reduce tax on the profit you make from exploiting that patent (or certain similar rights), for example, profit from selling a patented product or licensing the patent. You also need to elect into Patent Box and run the calculation properly.

If you’re loss-making, there may be little or no immediate benefit because there’s no profit to apply the 10% effective rate to. And even if you’re profitable, only the qualifying slice of profit is affected, the rest of your profits are taxed as normal.

‍“Patent Box only applies to royalties.”

No that's only part of it. HMRC’s guidance covers sales income on patented items and items incorporating the patented invention, alongside licensing and other IP-derived income categories. For many companies, product sales (not royalties) are the main driver of value.

“It only applies to UK sales, or we must manufacture in the UK.”

It’s not limited to UK sales, and it’s not a “must manufacture in the UK” scheme. What matters is whether the company claiming has the right qualifying IP and is generating qualifying profits from exploiting it.

If you sell products globally, you may still have Patent Box-relevant income but you need to calculate it properly and be able to show how you’ve identified and attributed the relevant profits. This is where good product/income mapping and (sometimes) streaming becomes important.

“We didn’t claim R&D tax credits, so we can’t claim Patent Box.”

R&D tax credits and Patent Box are separate regimes. You do not need to have claimed R&D tax credits in order to claim Patent Box (and vice versa).

However, Patent Box does expect you to meet its own conditions, especially the idea that you’ve made a real contribution to developing the patented invention (or a product that includes it). Also, if the R&D fraction applies to you, the amount of profit that benefits from Patent Box can be reduced depending on how much relevant R&D was done by your business versus acquired or outsourced in certain ways. So while R&D tax credits aren’t required, your R&D story and records still matter.

“We can ignore record-keeping because it’s ‘just a tax adjustment’.”

No, that’s a good way to invite a painful follow-up. HMRC explicitly recommends keeping sufficient records to evidence the deduction, including lists of IP rights (grant, acquisition, disposal, expiry), licence agreements, royalties, and evidence supporting the figures used in the computation.

If you can’t evidence those steps, it becomes hard to defend the number. The good news is that “good records” doesn’t have to mean perfect systems, it just means a clear, consistent approach that someone else can follow and understand.

“One small part of our product is patented, so all the profit on the whole product qualifies.”

Not automatically. Patent Box is meant to apply to the profit that’s linked to the patented invention, and the rules expect a sensible way of attributing profit to that patented element.

If the patent genuinely underpins the product’s commercial value (for example it enables the product to work, meet a spec, or deliver a key performance advantage), the qualifying profit can be meaningful. But if the patent relates to a minor feature in a broader product, you may need a more careful approach to avoid overstating the benefit. This is exactly why some businesses need “streaming” or a well-supported attribution method: it shows you’ve separated patented and non-patented value in a way that can be explained.

“We’ll wait until the patent is granted before we think about Patent Box.”

Waiting is how companies miss value and create last-minute scramble. You usually can’t apply Patent Box until the patent is granted, but you can often bring certain pre-grant profits into the year of grant once it is granted (subject to the rules and elections).

That only works smoothly if, while the patent is pending, you’re already:

• Tagging which products/income streams relate to the invention
• Keeping a simple record of relevant costs and margin logic
• Diarising the election window

If you leave it until grant, you often end up trying to rebuild product and cost attribution after the fact, which is slower, riskier and easier to get wrong.