Understanding Patent Box tax relief

The government launched the Patent Box tax relief incentive in April 2013 to encourage, incentivise and support companies that are dedicated to exploiting the intellectual property arising from their investment in research and development (R&D).

It allows qualifying companies to pay a reduced rate of corporation tax on profits derived from the commercial exploitation of UK and European Patent Office patents and some other types of intellectual property (IP), including patents granted by certain specified EEA states, supplementary protection certificates (SPCs) for pharmaceutical, medicinal and veterinary products and plant breeders’ rights amongst others.

The wider aim of the Patent Box, which exists as part of the Corporation Tax Act 2010, is to encourage UK companies to innovate and commercialise their patents, for their own benefit and that of the global export-reliant UK economy.

How does the Patent Box initiative work?

If your company qualifies, the Patent Box incentive may provide an effective Corporation Tax rate of 10% on any profits linked to the commercial exploitation of your patents (rather than the current full rate of 19%).

Although it was introduced in 2013, the programme has evolved in the years since. A new regime was introduced from 1 July 2016 for New Entrants and for existing claimants (under grandfathering provisions) from 1 July 2021 following concerns from the Organisation for Economic Co-operation and Development (OECD) that the incentive provided unfair competition compared to other similar incentives across Europe.

Who can benefit from Patent Box?

If your company owns or exclusively licences patents and it meets the development or active ownership condition, it could qualify for the Patent Box.  Where a company is part of a group, there are further aspects to consider.

Let’s put that in a handy checklist…

You can use the Patent Box if your company:

  • Is liable to corporation tax
  • Generates profit from commercially exploiting patented inventions
  • Owns (or has exclusively licenced-in) the patents or other qualifying IP
  • Has undertaken qualifying development on each of the qualifying IP (i.e. it must have made a significant contribution to either the creation or development of the patented invention or a product incorporating said invention) or be actively managing the IP portfolio.

Companies must actively elect into the Patent Box incentive to benefit from tax relief. There’s no special form for this but you can make an election either in the computations that accompany your Company Tax Return or separately in writing. This must be done within two years of the end of the accounting period in which the qualifying profits and income were generated.

How to calculate Patent Box relief

The main task businesses have is to calculate the profit to which the reduced Patent Box tax rate will apply. This can be a complex process, but it’s generally broken down into four steps:

  1. Identify taxable profits that can be attributed to income arising from the commercial exploitation of qualifying patented inventions. These profits are known as “relevant IP income”.
  2. Remove routine profit (known in the legislation as “routine return”) – this is the profit your business might expect to make without access to the IP in question.
  3. Remove any profit associated with the brand and other marketing assets.
  4. These relevant IP profits are then used to calculate the adjustment to the Company’s taxable profits.

We’ll help you navigate the complex Patent Box tax relief rules

With corporation tax at 19% for the current financial year and set to rise to 25% for the financial year beginning April 2023, patent-rich companies could have a lot to gain from the Patent Box tax relief incentive.

The Patent Box rules are complex, however, and any mistakes could compromise your application. It’s critical, therefore, that you work with a specialist advisory company that has the expertise, experience, knowledge and diligence to ensure your business gets the relief it’s entitled to.