What is Patent Box?

Patent Box sits alongside R&D tax relief as a strong financial incentive for companies to innovate. Patent Box was introduced by the government in April 2013 to reward the active exploitation of patented technology in the UK and remains a very generous tax relief for businesses utilising their patents.

How does Patent Box work?

When claiming Patent Box the qualifying profits that are linked to a qualifying Intellectual Property right are taxed at a significantly reduced CT rate of 10%, when compared to a company’s normal CT rate that could be between 19% and 25% depending on the level of profit.

What income qualifies for the reduced tax rate under the Patent Box regime?

To be eligible for the effective Corporation tax rate of 10%, income will need to come from at least one of the following:

• The sale of patented products or products containing a patented invention or bespoke spare parts
• The licensing of patent rights
• The sale patented rights
• Infringement income
• Damages, insurance or other compensation related to patent rights
• Your company can also benefit from the Patent Box if it uses a manufacturing process that is patented or provides a service using a patented tool

Do you need to be making profit from your own inventions?

Patent holders sometimes license their inventions to others for them to develop. If your company holds licenses to use someone else’s technology, you may still benefit from the Patent Box regime.

You must meet all of the following conditions

• Rights to develop, exploit and defend rights in the patented invention
• One or more rights to the exclusion of all other persons (including the licensor)
• Exclusivity throughout at least an entire national territory – rights to manufacture or sell within part of a country, for example, would not qualify as exclusive

Is the Patent Box regime complicated?

In order to protect the scheme from abuse, the rules were tightened up in 2016. Now it is a requirement for companies to demonstrate that they are actively doing something with their patents. So it’s no longer enough to show that you have qualifying patents or Intellectual Property.

The calculations for determining the qualifying expenditure for Patent Box tax relief can be complex and may need specific tax advice

What does an average Patent Box claim look like?

In 2022-23, HMRC project that 1,600 companies claimed £1.469 billion relief using the Patent Box.*

Most companies claiming were in the ‘Manufacturing’ sector (61%) which includes pharmaceuticals. There is also a significant variation in the number of companies claiming Patent Box across UK regions, with the highest number in the South East (15%) and the lowest of those reported in the North East (2%). Companies registered in London claimed the largest amount of relief (48%).

25% of companies claiming relief under the Patent Box in 2022-23 were classified as ‘large’, but these companies accounted for most of the relief claimed (94%).

Why don’t more firms claim?

Some start-up companies don’t claim if they aren’t generating revenue or profits yet. There will be others who haven’t filed patents – which raises another question about why firms choose to patent. There may be commercial reasons to consider filing for a patent, as well as the need to legally protect IP or competitive advantage. There may also be a few businesses that cannot claim for technical reasons.

However, we should be seeing more companies using the Patent Box scheme – everyone who is claiming R&D tax relief at least has the potential to benefit from Patent Box.

To find out if you can benefit, speak to one of our experienced specialists today by calling 01727 738600 or getting in touch through our web form today.

*Source: HMRC, September 2024