Patent Box Tax Relief was introduced in 2013 to encourage companies to retain and commercially use intellectual property within the UK. According to this tax incentive, the UK government offers a 10% reduced rate of corporation tax on profits earned from patented inventions.
To claim patent box tax relief, companies must meet the eligibility criteria. So, who is eligible for this tax relief? Well, this article is here to guide you through all the required information you need to know.
What is Patent Box Tax Relief?
The UK government introduced a patent box tax relief scheme in 2013, intending to encourage companies to keep and commercialize intellectual properties (IP) located in the UK. Therefore, the patent box policy allows eligible companies to apply a 10% reduced tax rate on the corporation tax and profits earned from patented inventions and IP-related income.
That’s why it gains interest over the years. According to patent box relief statistics released by HMRC in 2024, the number of companies claiming relief and the total tax benefits awarded have increased significantly. In its first year of the tax regime, 835 companies claimed a total of £376 million in tax relief. By 2022–23, the number of companies had almost doubled to around 1,600, with a £1.47 amount of tax relief claimed.
Manufacturing is stated to dominate the Potent Box regime usage by making up 62% of all claimants and receiving 42% of the total tax relief. Beyond manufacturing, sectors like wholesale and retail, Professional, Scientific and Technical Activities, Information and Communication stand out.
Who Is Eligible to Claim Patent Box Tax Deduction?
To benefit from this special tax regime, companies must meet the following requirements:
- Having a corporation tax liability
- Owning or holding an exclusive licence for a qualifying intellectual property right.
- Being involved in the development of the patent invention.
- Showing active involvement in the management and commercialization of the IP if the company is part of a company group.
- Carrying out R&D activities related to to patented product or process.
- Generating IP income.
Patent Box Regime After 30 June 2016
If your company entered the Patent Box regime after 30 June 2016, the amount of relief available may be limited due to changes introduced under the nexus principle. Your benefits may be reduced if:
- Your company purchased the patents rather than developing them internally
- You paid related parties to carry out R&D work on your behalf
These factors impact the R&D fraction. Thus, the greater the proportion of R&D undertaken directly by your company, the more generous the relief.
Which Income Qualifies for Patent Box Relief
Learning if your company is eligible for patent box tax relief is not enough in itself. You should also be aware of the qualifying income for it. This profit can come from:
- Items that use the patented technology, like specially made replacement parts
- Revenue generated by permitting others to use the patent
- Income received from selling patented products
- Compensation or settlements related to patent infringement, including damages and insurance claims
What Patents are Eligible?
To qualify for the UK Patent Box scheme, patents need to be officially granted by the UK Intellectual Property Office, the European Patent Office.
Besides the patent authorities of certain specified countries:
- Austria
- Bulgaria
- The Czech Republic
- Denmark
- Estonia
- Finland
- Germany
- Hungary
- Poland
- Portugal
Patent Box Calculation in 8 Steps
The patent box calculation results in a deduction that lowers taxable profits. So, you will benefit from a 10% corporation tax rate to apply. Here are the basic steps for you to calculate your patent box relief:
Step 1: Split IP Income into Two Streams
First, you look at all the money your company made from selling things and other trading income. Let’s say £1,000,000.
You split this into:
- Money earned from your patented technology, for instance, £400,000
- Money earned from everything else, the remaining £600,000
These two parts together add up to your total income.
Step 2: Break Down Relevant IP Income into Sub-Streams
If you have multiple patents or products, you divide the £400,000 further into smaller chunks.
For example:
- Product A with Patent 1 earned £250,000
- Product B with Patents 2 and 3 earned £150,000
If this process is hard to split exactly by patent, you can group similar products instead.
Step 3: Allocate Expenses
Now you figure out what costs relate to each income stream. For example, your total costs were £700,000.
You decide £280,000 of those costs were for the patented products (supporting the £400,000 income), and £420,000 for everything else.
Step 4: Deduct Expenses from Income and Calculate Residual Profits
Now it is time to subtract the expenses from your income, following the same example:
- Patented products: £400,000 – £280,000 = £120,000 profit
- Other products: £600,000 – £420,000 = £180,000 profit
Then you take a 10% tax incentive off the patented product profit:
- 10% of £280,000 = £28,000
- Your qualifying income will be £120,000 – £28,000 = £92,000
Step 5: Marketing Asset Return Deduction
If your patents are linked to special brands or marketing assets, you might deduct some amount here.
Step 6: Apply the R&D Fraction
At this step, you need to check how much R&D your company did directly and what was outsourced. For example, your company did 80% of the R&D related to these patents with a fraction of 0.8. You need to multiply your profit by it:
- £92,000 × 0.8 = £73,600
Step 7: Include Patent Pending Periods
If you claimed relief on profits before the patent was granted, you add those profits here. Otherwise, you can skip this step.
Step 8: Calculate Patent Box Deduction
Normally, companies pay the UK corporation tax at a rate of 25%. However, within the frame of the patent box, you pay only a 10% tax rate on your qualifying profits.
Following the same example we mentioned above:
- Without Patent Box, you would pay 25% tax on the £73,600 relevant IP profit = £18,400 tax.
- With the UK patent box regime, you pay 10% tax on the same £73,600 = £7,360 tax.
- Therefore, you will have £11,040 tax savings.
How to Claim Patent Box Relief on Intellectual Property (IP)
Once you qualify for the patent box benefit, your company must make an election within two years after the end of the accounting period. You can either do this with tax computations submitted alongside your Company Tax Return or separately in writing.
The process can be complicated, so it is highly recommended to work with a professional.
How Far Back Can I Claim Patent Box Relief?
You can benefit from patent box legislation on profits made while your patent is still pending, for up to six years before it’s officially granted. Once your patent is approved, you can claim these benefits for that earlier period too.
The Correlation Between R&D Tax and Patent Box
R&D tax relief aims to encourage Research and Development activities in the UK. It is closely related to the patent box because they are both designed to reward companies for their engagement in patented inventions.
Since 2016, the UK Patent Box has used a “nexus approach,” which means the amount of relief depends on how much R&D the company has done itself. Therefore, the more R&D your company undertakes on its patented technology, the larger the share of profits eligible for the reduced 10% tax rate.
