What is Patent Box tax relief for UK companies?

Full answer

Patent Box is a specific Corporation Tax relief aimed at encouraging UK companies to both develop and retain valuable intellectual property in the UK, rather than merely holding the IP as a separate, largely passive commercial asset. **The reduced 10% rate** Profits that qualify for Patent Box treatment are taxed at an effective Corporation Tax rate of 10%, substantially below the standard main rate of 25% (or the small profits rate of 19% for companies with lower profits) that would otherwise apply -- a significant incentive for companies with valuable patented technology generating meaningful profit. **What qualifies as relevant IP** Qualifying IP mainly means patents granted by the UK Intellectual Property Office, the European Patent Office, or certain other specified national patent offices within the EEA -- not just any registered trademark or design right, and not patents pending that have not yet been granted (though companies can sometimes claim provisional relief for the period a patent application was pending, once it is eventually granted). Certain other IP rights, such as supplementary protection certificates and plant variety rights, can also qualify in specific circumstances. **The "nexus" requirement -- genuine development activity** To prevent companies simply buying in patents developed elsewhere purely to access the lower tax rate, Patent Box includes a "nexus" fraction requirement, broadly linking the proportion of profit that can benefit from the reduced rate to the proportion of the qualifying R&D and development expenditure that the claimant company itself actually carried out (as opposed to expenditure on acquiring the IP or paying a connected party to do the development work) -- companies that genuinely research, develop, and patent their own technology in-house generally get the fullest benefit. **How qualifying profit is calculated** Calculating the specific profit attributable to qualifying patents involves a detailed, multi-step calculation (identifying relevant IP income, deducting a routine return and, where relevant, a marketing asset return, and applying the nexus fraction) -- this is one of the more complex UK tax reliefs to calculate correctly, and companies often need specialist tax advice to prepare a robust claim. **Election required** Patent Box relief is not automatic -- a company must actively elect into the regime (generally within a set time limit, commonly within 2 years of the end of the accounting period the election is to first apply to), and can choose to elect out again if the relief later proves not to be beneficial, though specific rules govern how quickly a company can re-elect back in after opting out. **Worked example** A UK medical devices company holds a UK patent for a novel surgical instrument it developed entirely in-house through its own R&D team, generating £2 million of annual profit specifically attributable to sales of the patented device. After electing into Patent Box and completing the qualifying profit calculation (including the nexus fraction, which in this case is close to 100% since all development was carried out by the company itself with no acquired IP or connected-party development costs), the company can apply the 10% Patent Box rate to a large proportion of this £2 million profit, rather than the standard 25% main rate, producing a substantial Corporation Tax saving compared with not claiming the relief. **Practical tip** Companies with valuable patented technology should review whether they are eligible for Patent Box well before filing their Corporation Tax return, since the election has a specific time limit and the underlying calculation (particularly the nexus fraction and profit attribution) is detailed enough that specialist tax advice is usually worthwhile to maximise a valid claim.

Try the calculator