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Tax

What is Patent Box?

Patent Box is a tax relief that allows companies to apply a lower 10% Corporation Tax rate to profits from patented inventions.

Current Rate (2025/26)

10% Corporation Tax (vs standard 25%)

Example

Your patented product generates £100k profit. Patent Box could reduce tax from £25k to £10k.

Key Dates

Must own or exclusively license qualifying patents

How Patent Box Works in Practice

The Patent Box regime allows UK companies to apply an effective 10% Corporation Tax rate to profits earned from qualifying patented inventions, compared to the standard 25% rate. This can result in a significant tax saving for companies that hold patents and generate income from them.

To qualify, your company must own or exclusively license a qualifying patent that has been granted by the UK Intellectual Property Office (UKIPO), the European Patent Office (EPO), or certain other designated national patent offices in the European Economic Area. Pending patent applications do not qualify until the patent is granted, although you can make a backdated claim once the patent is approved.

The company must also have undertaken qualifying development activity on the patented invention. This means the company (or a group company) must have either created or significantly contributed to the creation of the invention, or performed significant development activity to exploit the patent. Simply acquiring a patent without doing development work does not qualify under the 'nexus' rules introduced to align the UK Patent Box with OECD BEPS guidelines.

The profits eligible for Patent Box relief include income from selling patented products, licensing income from the patent, damages or insurance proceeds from patent infringement, and a notional royalty for using the patent within your own business (embedded patent income). The calculation of the Patent Box deduction is complex and involves a 'streaming' exercise to isolate the profits attributable to the patent.

Step by Step

The Patent Box election is made through your Corporation Tax return. Once elected, the regime applies to all qualifying patents held by the company. The election is ongoing until withdrawn.

Calculating the benefit involves several steps. First, you identify your relevant IP income - this includes sales income from patented products, licence fees, and embedded royalties. Then you deduct routine expenses using a formula to arrive at the 'relevant IP profits'. The qualifying residual profit is then adjusted by the 'nexus fraction', which limits the benefit based on how much of the R&D was performed by the company itself (versus subcontracted).

The Patent Box deduction is then calculated to reduce the effective tax rate on qualifying profits from 25% to 10%. In practice, this means a deduction equal to the qualifying profit multiplied by the difference between the main CT rate and 10%, divided by the main CT rate. This deduction is shown on your CT600 and reduces your Corporation Tax liability.

The relief phases in over a period - historically over five years, but companies entering the regime now get full relief immediately. You can combine Patent Box with R&D tax credits, claiming R&D relief on the development costs and then Patent Box on the resulting profits.

Practical Tips

  • Review your existing products and processes for patentable inventions - many companies have patentable technology but have never applied, missing out on Patent Box savings
  • Make the Patent Box election in your CT600 as soon as you hold a qualifying patent, even if the profit calculation is modest initially - it costs nothing to elect
  • Keep detailed records of your R&D expenditure split between in-house and subcontracted work to support the nexus fraction calculation
  • Consider whether design rights, plant variety rights, or supplementary protection certificates (for pharma) might also qualify alongside patents

Common Mistakes to Avoid

  • Assuming that having a patent is sufficient to claim - you must also have performed qualifying development activity on the invention to satisfy the nexus requirement
  • Forgetting that only granted patents qualify, not pending applications - though you can backdate the claim once the patent is granted
  • Not considering embedded patent income from using your own patents within the business - this is often a significant source of qualifying profit that companies overlook
  • Attempting to claim Patent Box without proper documentation of the nexus fraction calculation, which HMRC will scrutinise closely

Frequently Asked Questions

Can I claim Patent Box on a pending patent application?

No, the patent must be granted. However, once it is granted, you can make a backdated claim to the date you filed the election or the date the application was made, whichever is later. This means you can recover the benefit for periods when the patent was pending.

Does Patent Box apply to software patents?

The UK generally does not grant patents for software as such, but software that has a technical effect or solves a technical problem can be patented. If your software patent is granted by the UKIPO or EPO, it qualifies for Patent Box. This is more common in areas like embedded systems, control algorithms, and data processing methods.

Can I claim both R&D tax credits and Patent Box?

Yes. They apply to different stages. R&D tax credits give relief on the development costs when you incur them. Patent Box gives a reduced tax rate on the profits generated from the patented invention in future years. They are complementary reliefs.

How much tax can I save with Patent Box?

The maximum benefit is reducing your effective Corporation Tax rate from 25% to 10% on qualifying profits. For a company with £200,000 of qualifying patent profits, this means paying £20,000 instead of £50,000 in tax - a saving of £30,000.

Source: HMRC Corporate Intangibles Research & Development Manual CIRD200100 - Patent Box: overview; Finance Act 2012 Part 8A

Related Terms

R&D Tax Credits

R&D tax credits are a UK tax relief for companies that spend money on research and development to advance science or technology.

Corporation Tax

Corporation Tax is the tax UK limited companies pay on their profits. It's like income tax, but for businesses instead of people.

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