UK Patent Box: How to Pay 10% Corporation Tax on IP Profits

What is the Patent Box?

The Patent Box is a UK Corporation Tax regime that allows companies to apply a reduced CT rate of 10% to profits attributable to qualifying intellectual property (IP). It was introduced in April 2013 to encourage innovation and keep valuable IP in the UK.

For 2026/27, the main CT rate is 25% for companies with profits above £250,000 (with marginal relief between £50,000 and £250,000 and a small profits rate of 19%). The Patent Box rate of 10% therefore represents a saving of up to 15 percentage points on qualifying profits.

The regime is available to companies (not individuals or partnerships) that own or exclusively license qualifying IP rights and actively participate in the development or management of that IP.

Qualifying IP rights

Not all intellectual property qualifies. The Patent Box specifically covers:

• Patents granted by the UK Intellectual Property Office (UK IPO).
• Patents granted by the European Patent Office (EPO).
• Patents granted by the national patent offices of: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden (EU member states with qualifying patent offices under pre-Brexit UK legislation, maintained as qualifying offices post-Brexit).
• Supplementary Protection Certificates (extensions to patent protection for medicines and plant protection products).
• Certain plant variety rights granted in the UK or EU.
• Regulatory data protection (exclusivity periods for pharmaceutical data).

What does NOT qualify

• Copyrights (software, books, music, film).
• Trade marks and brand names.
• Design rights.
• Know-how and trade secrets.
• Patents that are pending (only granted patents qualify -- but once granted, profits from the date of application can be included through the "patent pending" mechanism).

Qualifying companies

A company qualifies for the Patent Box if it:

1. Holds (owns or exclusively licenses in) a qualifying IP right.
2. Has made a qualifying development contribution -- meaning the company has undertaken or contributed to the creation, or has significantly developed, or actively managed the IP.
3. Has elected into the regime.

The qualifying development test ensures that companies cannot simply acquire a patent and park it in the UK to benefit from the 10% rate without genuine substance. The company must have been meaningfully involved in the development process.

The nexus approach (OECD BEPS-compliant)

The UK Patent Box was reformed in 2016 to comply with the OECD's Base Erosion and Profit Shifting (BEPS) Action 5, which requires that tax benefits on IP income must be linked to the amount of R&D actually carried out by the company claiming the benefit.

The nexus approach uses a fraction to calculate the proportion of IP profit that qualifies for the 10% rate:

Qualifying fraction = (D + A x 1.3) / (D + A + S + LA)

Where:

• D = R&D expenditure incurred directly by the company in relation to the IP.
• A = expenditure on R&D acquired from unconnected third parties.
• S = expenditure on R&D subcontracted to connected parties (related companies, subsidiaries).
• LA = expenditure on acquisition of the IP itself.

The 1.3 uplift (capped at total R&D costs) rewards companies that do the R&D themselves (or outsource to unconnected third parties) by allowing a 30% uplift on those costs.

In plain English: the more of your R&D you do yourself, the higher the fraction of your IP profits that qualifies for the 10% rate. If you developed everything in-house, your qualifying fraction approaches 100%. If you outsourced all development to a foreign group company and then bought the IP, your qualifying fraction could be very low.

The streaming method

Since 2016, the streaming method is the default approach for calculating Patent Box profits. The previous "formulaic" approach is no longer available for new entrants.

Under streaming, a company must:

1. Identify all IP assets that are subject to Patent Box elections.
2. Attribute income to each IP asset (patent royalties, sales proceeds, embedded income in product sales, licence fees).
3. Attribute costs to each IP asset (direct costs of generating that income).
4. Calculate the qualifying residual profit (roughly: revenue less expenses less a routine return on assets and functions) for each IP asset.
5. Apply the nexus fraction to the qualifying residual profit.
6. Apply the 10% rate to the resulting figure.

Routine return deduction

The Patent Box applies only to the "super-normal" profit -- the profit above what the company would earn from its normal business activities without the IP. HMRC requires a deduction for the routine return, calculated as 10% of the company's relevant cost base, to exclude routine profits from the regime.

Worked example

A pharmaceutical company has the following figures for its accounting year ending 31 March 2026:

• Total company profits: £10,000,000
• Profits attributable to Patent Box IP after streaming: £3,000,000
• Qualifying residual profit after routine return deduction: £2,400,000
• Nexus fraction (90% R&D done in-house): 0.90
• Qualifying Patent Box profits: £2,400,000 x 0.90 = £2,160,000

Tax calculation:

Without Patent Box:

• CT at 25% on £10,000,000 = £2,500,000

With Patent Box (streaming applied):

• CT at 25% on £7,840,000 (non-Patent Box profits) = £1,960,000
• CT at 10% on £2,160,000 (Patent Box profits) = £216,000
• Total CT: £2,176,000
• Saving: £324,000

The effective CT rate on total profits falls from 25% to 21.76%.

Electing into the Patent Box

A Patent Box election is made on the CT600 Corporation Tax return. There are two key timing rules:

• The election must be made within 2 years of the end of the accounting period to which it relates.
• An election is made on a period-by-period basis. A company can choose not to elect for a period (e.g. if profits are very low or losses exist) and elect in a future period.

Once an election is made for a period, it is irrevocable for that period. Companies can effectively "bank" election rights for up to 2 years.

Patent pending profits

A company can capture profits earned before the patent was formally granted by making a "patent pending" election alongside the main election. Once the patent is granted, the company can stream back income and profits earned from the date the patent application was filed (not the grant date). These are capped at a maximum amount agreed with HMRC.

Interaction with R&D tax credits

Companies can claim both R&D tax credits and Patent Box in the same period. The two regimes are designed to be complementary:

• R&D credits reduce the cost of developing the IP (cash flow benefit during development).
• Patent Box reduces the tax rate on profits once the IP is commercialised (benefit at commercialisation stage).

However, there is an interaction through the nexus calculation:

• Under the Merged R&D Scheme (which replaced RDEC for accounting periods from April 2024), R&D credits are treated as taxable income above the line. This affects the profit figure on which Patent Box is calculated.
• Under the SME scheme (if still applicable), the enhanced deduction reduces profits before Patent Box is applied.

In most cases, claiming both regimes is beneficial. The nexus fraction is generally higher when R&D is done by the company itself -- which is a prerequisite for claiming RDEC or SME R&D credits in the first place.

Common planning points

• Register patents early. The earlier a patent is applied for, the earlier the patent-pending clock starts for capturing back-dated profits.
• Group structures. Within a group, only the IP-owning entity can directly claim Patent Box. If IP is held in a holding company and licensed to trading subsidiaries, the holding company's royalty income can qualify, but the trading subsidiary's profits do not qualify directly.
• Mixed IP products. Products that incorporate both patented and non-patented features need careful streaming analysis to correctly attribute income.
• ATED and other charges. Patent Box has no interaction with the Annual Tax on Enveloped Dwellings or Stamp Duty Land Tax -- it is a CT-only regime.

Sources

• HMRC: Patent Box
• HMRC: CT600 guidance on Patent Box
• OECD: BEPS Action 5 modified nexus approach
• HMRC: Patent Box: technical guidance