Check if your company can pay a reduced rate of 10% Corporate Tax if it exploits patented inventions and innovations.
The Patent Box is designed to encourage companies to keep and commercialise intellectual property in the UK. It allows companies to apply a lower rate of Corporation Tax to profits earned from its patented inventions.
Companies must elect into the Patent Box to apply the lower rate of Corporation Tax which is 10%. This relief was introduced in phases from 2013 up until 2017.
This guidance only refers to patents. but if your company holds certain other medicinal or botanic innovation rights it can also take advantage of Patent Box benefits.
Who can benefit
You can only use the Patent Box if your company:
- is liable to Corporation Tax
- makes a profit from exploiting patented inventions
- owns or has exclusively licenced-in the patents
- has undertaken qualifying development on the patents
If you elected to the Patent Box after 30 June 2016
After this date benefits are restricted if your company
- incurred expenditure in acquiring the patents
- made payments to connected parties for their research and development (R&D) expenditure
The R&D fraction shows how much this affects the calculation.
What makes a patent eligible
To benefit from the Patent Box your company must own or exclusively licence-in patents granted by:
- the UK Intellectual Property Office
- the European Patent Office
- these countries in the European Economic Area:
- Czech Republic
Your company (or another group company) must also have undertaken qualifying development for the patent. It must have made a significant contribution to either:
- the creation or development of the patented invention
- a product incorporating the patented invention
Groups of companies
If your company is a member of a group, it must:
- actively own the patented invention
- take a significant role in managing its whole portfolio of eligible patents
Exclusively licensing-in patents
Patent holders may wish to licence their inventions for others to develop.
If your company holds licences to use others’ patented technology it may use the Patent Box if it meets all the following conditions. The licensee must have:
- 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 an entire national territory (rights to manufacture or sell in part of a country would not qualify)
The licencee must meet one of these conditions:
- be able to bring infringement proceedings to defend its rights
- be entitled to the majority of damages awarded in successful proceedings relating to its rights
When a group company may hold an exclusive licence
Within a group, one company in the group may own a portfolio of patents while others exploit them. You may treat a group company as holding an exclusive licence if:
- it has been granted exclusive rights within an entire national territory
- no one else has these rights (including the licensor or the group intellectual property holding company)
The group company does not need to have the rights to enforce, assign or grant a licence for these rights.
Income from exploiting patented inventions
Identify profits from intellectual property
Not all of your company profits may come from exploiting patented inventions. To class profits as intellectual property income, they must come from at least one of the following activities:
- Selling patented products including:
- the patented product
- products incorporating the patented invention
- bespoke spare parts
- licensing out patent rights
- selling patented rights
- infringement income
- damages, insurance or other compensation related to patent rights
Companies in the manufacturing and service sectors can generate qualifying income for the Patent Box if they:
- manufacture using a patented process
- provide a service using a patented tool
In these circumstances a notional royalty can be treated as income from intellectual property.
Identify which profits to enter into the Patent Box
To identify profits to enter in the Patent Box, separate relevant intellectual property income from other income.
You can do this by streaming income if your company:
- elected in after 30 June 2016
- had new patents after 30 June 2016
- is in the Patent Box from 1 July 2021
Elect into the Patent Box
You have to make an election to benefit from the reduced rate of Corporation Tax that applies to the Patent Box. This must be done within 2 years after the end of the accounting period in which the relevant profits and income arose. You can make an election:
- in the computations accompanying your Company Tax Return
- separately in writing.
There is no special form of words for this election and no box on the Corporation Tax return.
Patent Box calculation steps
The calculation steps create a deduction which reduces the profits so that the reduced rate of 10% is applied to the relevant profits.
To help you work through the steps to take within that calculation use the Patent Box decision tree.
Remember that the R&D fraction will be 1 and Patent Box deductions unrestricted if:
- there are no acquisition costs
- all the research and development is undertaken within the company or by third party subcontractors
The calculation’s complexity will depend on the number and type of patented products. This will vary between different businesses and sectors.
Answers to your Patent Box questions
There is a Specialist Incentive and Relief team which can help you with Patent Box questions. You can contact them, putting Patent Box as the subject of the email:
- before making a claim
- while you are putting together your claim
If HMRC Large Business handles your company’s tax affairs, you should contact your customer compliance manager.