Skip to main content

The Patent Box: Could you be missing out on a 10% Corporation Tax rate?

The UK’s generous Patent Box regime offers an effective Corporation Tax rate of just 10% on worldwide profits which are earned from qualifying patents.

The introduction of the Patent Box regime was designed to encourage companies to commercialise their existing patents as well as to support the development of new innovative products.

The latest statistics published in September 2020 show that 1,230 companies have so far made claims for the 18/19 tax year. Large companies account for 23% of the claims by number but claim 90% of the relief by value.

£5.3bn has been claimed in Research and Development (R&D) tax credits for 18/19 but only £992m in Patent Box relief for the same period. As the two reliefs are intrinsically linked, this suggests that there is substantial scope for additional Patent Box claims to be made by qualifying companies which may not yet be aware of the benefits of the Patent Box available to them.

Which companies are eligible?

The Patent Box is available for all companies with qualifying income from UK or European patents, with no restrictions on company size or industry.

In order to claim, the company must own or exclusively license patents granted by:

  • the UK Intellectual Property Office
  • the European Patent Office or
  • a specified EEA Country

Notable exceptions to the above are patents granted by patent offices in France, Spain, Italy, the US, and Japan.

The claimant company must also meet what is known as the development condition. The company must have either created or significantly contributed to the creation of the Intellectual Property (IP).

If the development condition is met by the activities of another group company, the claimant company must actively manage the IP rights.

From 1 July 2016 there is a requirement to link substantive R&D activity to any Patent Box deduction.

The development of the patent does not have to take place in the UK, so long as the company is subject to UK Corporation Tax and all other legislative conditions are met.

How is the relief calculated?

There is a complex multi-step calculation to arrive at the amount eligible for Patent Box relief.

The calculation identifies relevant income and profits, which includes worldwide licensing and royalty income, sales income from the patent or products incorporating the patent, patents used in processes or services as well as income from damages for patent infringement.

Note that it is possible for relief to apply to profits from the worldwide sales of patented products, even if the patent only applies to a small part of the total product.

The effect of the Patent Box is equivalent to the profits eligible for relief being chargeable to Corporation Tax at the lower rate of 10%.

The calculations work by allowing an additional deduction to be made in calculating the taxable profits of the company, rather than by charging a lower rate of tax.

How do I make a claim?

The company needs to make an election to join the regime. Usually this is made via the company’s Corporation Tax return.

The election must be made within two years after the end of the relevant accounting period in which relief is claimed.

Once the election is made, the election stays in place until the company revokes it, in which case it cannot re-elect back in for five years.

An election by one group company does not apply to any other group companies.

There is no statutory requirement to submit a patent box report nor is there any special form of words for an election to be made.

How can we help?

We can review your existing patents as well as any pending patents and the income derived from them and advise if your company is eligible to make a claim in its tax return.

If eligible, we can prepare the detailed calculations required to compute the relief.

We can also review any group structure in place and suggest improvements to maximise the potential relief claim, for example by ensuring that R&D activities are in the same company as the Patent Box claimant.

Would you like to know more?

If you have any questions about how your company can claim for the Patent Box relief and how to maximise the opportunities available to you, please get in touch with Lucy Graham using the details on this page. For any other queries, please get in touch with your usual Blick Rothenberg contact.

You can also visit our Technology Hub for more information and insights.