What is Patent Box tax relief and how does it work?

Full answer

The Patent Box is a Corporation Tax relief designed to encourage companies to develop and commercialise patented technology in the UK. Qualifying profits attributable to patented inventions are taxed at an effective rate of 10%, well below the standard Corporation Tax rates of 19% on profits up to GBP 50,000 and 25% above GBP 250,000 (with marginal relief in between). Who it affects: it is only for companies (it does not apply to sole traders or partnerships), and the company must be liable to Corporation Tax, own or hold an exclusive licence to qualifying patents granted by the UK Intellectual Property Office, the European Patent Office or certain other bodies, and have been involved in the development of the patented invention. The relief covers profits from selling patented products, licensing the patents, selling the patents, and even using a patented process in your own business. How it works in practice: a company must formally elect into the regime, then carry out a multi-step calculation to strip out the routine return and any marketing-attributable profit, leaving the residual IP profit. A nexus fraction then links the relief to the company's own R&D spend, so businesses that outsource most of their development or simply buy in patents get less benefit. The reduced rate is delivered as an additional deduction in the Corporation Tax computation rather than a separate lower headline rate. Worked illustration of the saving (mechanism only): if GBP 200,000 of profit qualifies and would otherwise be taxed at 25%, the Patent Box brings that down toward an effective 10%, a meaningful reduction - the exact figure depends on the nexus and profit-stripping calculation. Patent Box can be combined with R&D tax relief. Because the calculation is complex and election timing matters, most companies take specialist advice. Use the corporation tax calculator to compare your liability at standard rates against the 10% Patent Box rate.

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