Patent Box Advice Alongside Your R&D Claims
Patent Box is a UK regime that lets companies pay an effective 10% rate of Corporation Tax on profits that come from qualifying patents, instead of the main 25% rate. It often follows R&D projects, and the same specialist can help with both, because the Patent Box calculation tracks the R&D spending behind each patent.
How does Patent Box work?
Patent Box works by giving an additional deduction that reduces the tax on qualifying patent profits to an effective 10%. The profits can come from selling patented products, products that include a patented part, licensing or selling the patent, or damages for infringement. The calculation strips out routine profit and marketing related returns, then applies a “nexus fraction” that reflects how much of the R&D behind the patent the company did itself.
Why does it fit with R&D tax relief?
Patent Box fits with R&D relief because the nexus fraction uses the same records of R&D spend by project. Companies that already track R&D costs well for their claims find Patent Box much easier to compute. R&D relief rewards the spending; Patent Box rewards the profit when the invention earns money.
Is Patent Box worth it?
Patent Box is worth it mainly for companies with material, sustained profits from patented products. For a company with £1 million of qualifying relevant profits taxed at 25%, the saving could be up to £150,000 a year, although the real figure depends on the calculation steps. For smaller profits, the compliance cost may outweigh the benefit. A specialist will model it before you elect.
What does a Patent Box specialist do?
- Confirms which patents and income streams qualify
- Builds the streaming or standard calculation and nexus fraction
- Prepares the election and the figures in the return
- Sets up records so future years are quicker
Which income qualifies for Patent Box?
- Sales of patented products, or products that contain a patented part
- Licence fees and royalties for qualifying patents
- Proceeds from selling a qualifying patent
- Damages and compensation for infringement
- A notional royalty for using a patented process to make non-patented products
How is the Patent Box deduction calculated?
The calculation follows a fixed sequence. First, identify relevant IP income. Second, deduct routine profit, a fixed return on certain costs that represents what the business would earn without the patent. Third, deduct a marketing assets return for the value of brands and other marketing intangibles where relevant. The remainder is the relevant IP profit. Fourth, apply the nexus fraction, which reduces the profit if a large share of the R&D behind the patent was bought in or done by connected parties. The deduction then reduces the tax on that profit to an effective 10%.
What is the nexus fraction?
The nexus fraction compares the R&D your company did itself, or subcontracted to unconnected parties, with the total R&D spending including bought-in IP and connected party work. Companies that do most of their own development get close to the full benefit. This is why accurate R&D records by project help with both R&D relief and Patent Box.
Common Patent Box mistakes
- Missing the two-year deadline to elect
- Assuming all product income qualifies when only some products use the patent
- Not tracking R&D spending by patent family, making the nexus fraction hard to calculate
- Electing when profits are small and the compliance cost outweighs the saving
What should you prepare?
Prepare a list of granted patents and pending applications, the products and income each one supports, and your R&D spending by project for recent years. A specialist will use these to model the benefit before you elect.
What kinds of rights qualify?
Qualifying rights are mainly patents granted by the UK Intellectual Property Office or the European Patent Office, and patents granted by certain other European offices. Some other rights also qualify, such as supplementary protection certificates for medicines, regulatory data protection and plant variety rights. Trade marks, copyright and know-how alone do not qualify.
What is the development condition?
A company must have carried out qualifying development on the patent or its application, such as creating the invention or significantly developing it, or be part of a group where another company did. Companies that simply buy patents without developing them usually cannot use Patent Box unless they meet the active ownership conditions.
Can you claim for profits before the patent is granted?
Yes, within limits. If you elect into Patent Box while an application is pending, profits from the period between filing and grant can be brought into the calculation in the year the patent is granted, subject to time limits. This makes it worth considering Patent Box early, even before grant.
Example of the saving
Illustration. A company has £500,000 of relevant IP profit after the routine and marketing deductions, and a nexus fraction of 100% because it did all the development itself. Without Patent Box, that profit would be taxed at 25%, which is £125,000. With Patent Box, the effective rate is 10%, which is £50,000, a saving of £75,000.
Does Patent Box affect R&D relief?
No. You can claim R&D relief on the development costs and Patent Box on the later profits. They reward different things and work together.
Is Patent Box right for a start-up?
Usually not yet. Patent Box only helps once there are taxable profits from patented products or licences. Start-ups should still track R&D spending by project and patent family, so that when profits arrive the nexus fraction can be calculated easily and the election made in time.
How long does a Patent Box calculation take?
The first calculation takes longest, because income streams, patents and R&D spend must be mapped and a method chosen. Later years are quicker if records are kept by patent family. A specialist should give you an estimate of the benefit before you decide to elect, so you know whether the work is worth it.
Frequently asked questions
Who can use Patent Box?
A company liable to UK Corporation Tax that owns, or holds an exclusive licence to, patents granted by the UK Intellectual Property Office, the European Patent Office or certain other EEA offices, and that has done qualifying development on them.
Do we need a granted patent?
Yes, relief applies once the patent is granted, although profits from the period while the application was pending can be claimed back once it is granted, within limits.
How do we opt in?
By making an election within two years of the end of the first accounting period you want it to apply to.
Get matched with a vetted R&D tax specialist
Tell us what you do and roughly what you spend on development. We check the basics, then introduce you to a specialist from our panel whose sector experience fits your work.
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