What is the Patent Box and How Does It Work?

The Patent Box is a tax relief scheme that allows UK companies to pay a reduced rate of Corporation Tax on profits generated from patented inventions. Instead of the standard Corporation Tax rate, qualifying companies can apply a rate of just 10% to profits from their patents,...

What is the Patent Box?

The Patent Box scheme was introduced to encourage companies to keep and commercialise intellectual property in the UK. It recognises that developing patented inventions requires significant investment and rewards companies that undertake this work by reducing their tax bill on the profits those patents generate.

The scheme applies a Corporation Tax rate of 10% to qualifying patent profits, rather than the main Corporation Tax rate. This relief was introduced in phases between 2013 and 2017 and remains available for the 2025/26 tax year and beyond.

While this guidance focuses on patents, companies holding certain other rights (such as medicinal or botanic innovation rights) may also benefit from similar treatment.

Who can use the Patent Box?

Your company can use the Patent Box if it meets all of these conditions:

It is liable to Corporation Tax
It makes a profit from exploiting patented inventions
It owns the patents or has exclusively licensed them in
It has undertaken qualifying development on the patents

The qualifying development requirement is important. Your company (or another group company) must have made a significant contribution to either creating or developing the patented invention itself, or to a product that incorporates the patented invention.

Which patents are eligible?

To qualify for Patent Box relief, your patents must be granted by one of the following authorities:

The UK Intellectual Property Office
The European Patent Office
Patent offices in specific European Economic Area countries: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, or Sweden

Your company must either own these patents outright or hold an exclusive licence to use them.

What does "exclusively licensing-in" mean?

If your company doesn't own the patent but licences it from someone else, you can still use the Patent Box if the licence meets strict conditions. The licence must give your company:

Rights to develop, exploit and defend the patented invention
One or more rights to the exclusion of all other persons (including the patent owner)
Exclusivity throughout an entire national territory (partial regional rights don't qualify)

Additionally, your company must either be able to bring infringement proceedings itself, or be entitled to the majority of damages if infringement proceedings succeed.

For groups of companies, there are special rules. One group company may own a portfolio of patents while others exploit them. A group company can be treated as holding an exclusive licence if it has been granted exclusive rights within an entire national territory and no one else (including the licensor) has these rights.

What counts as income from patented inventions?

Not all your company's profits will qualify for Patent Box treatment. To count as intellectual property income, profits must come from at least one of these activities:

Selling patented products, including the patented product itself, products incorporating the patented invention, or bespoke spare parts
Licensing out patent rights to others
Selling patented rights
Infringement income
Damages, insurance or other compensation related to patent rights

Manufacturing and service companies can also generate qualifying income if they manufacture using a patented process or provide a service using a patented tool. In these cases, a notional royalty can be treated as income from intellectual property.

You'll need to separate your relevant intellectual property income from other income. Companies that elected into the scheme after 30 June 2016, had new patents after that date, or have been in the Patent Box from 1 July 2021, can do this through a process called "streaming income".

Restrictions for recent entrants

If your company elected into the Patent Box after 30 June 2016, the benefits may be restricted if your company:

Incurred expenditure acquiring the patents (rather than developing them internally)
Made payments to connected parties for their research and development expenditure

These restrictions are calculated using something called the "R&D fraction", which adjusts the Patent Box deduction based on how much qualifying development your company actually undertook. The R&D fraction will be 1 (meaning no restrictions apply) if there are no acquisition costs and all research and development is undertaken within your company or by third-party subcontractors.

How to elect into the Patent Box

Using the Patent Box isn't automatic—you must make an election to benefit from the reduced 10% Corporation Tax rate. This election must be made within 2 years after the end of the accounting period in which the relevant profits and income arose.

You can make the election either:

In the computations accompanying your Company Tax Return
Separately in writing

There is no special form or box on the Corporation Tax return for this election.

How the calculation works

The Patent Box calculation creates a deduction that reduces your profits so that the 10% rate applies to the relevant patent profits. The calculation can be complex, depending on the number and type of patented products your company holds.

The steps involve identifying qualifying income, calculating the proportion of that income attributable to patents, applying the R&D fraction (where relevant), and computing the appropriate deduction. HMRC provides decision trees and worked examples to help companies work through the calculation.

Getting help with your Patent Box claim

HMRC has a Specialist Incentive and Relief team that can help with Patent Box questions before you make a claim or while you're putting your claim together. You can contact them by email with "Patent Box" as the subject line.

If HMRC Large Business handles your company's tax affairs, you should contact your customer compliance manager instead.

Sources

Use the Patent Box to reduce your Corporation Tax on profits

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.