Patent Box Tax Relief is one of the UK government’s most powerful yet underutilised business tax incentives. If your company owns patents or holds an exclusive licence over patented technology, you could be paying far more Corporation Tax than necessary. Designed to encourage businesses to keep their research, development and intellectual property in the UK, Patent Box Tax Relief allows qualifying companies to apply an effective 10% Corporation Tax rate to profits attributable to eligible patented inventions, rather than the 25% main rate that applies to many profitable companies.

This guide covers what Patent Box is and why it was introduced, whether your company qualifies, how to elect into the regime and how Patent Box works alongside R&D Tax Credits to maximise your overall tax position.

At DS Burge & Co, our business tax experts can help your company utilise the Patent Box to minimise corporation tax liability and maximise the return on your intellectual property.

Table of Contents

What is the Patent Box Regime?

The Patent Box regime is a UK Corporation Tax (CT) incentive that allows companies to apply a reduced effective tax rate of 10% to profits earned from qualifying patented inventions. Companies can elect into the regime to pay this lower rate on profits attributable to qualifying intellectual property (IP), rather than the 25% main rate of Corporation Tax. The relief is delivered through an additional deduction in the company’s tax calculation, reducing taxable profits so the overall benefit is equivalent to a 10% tax rate on those qualifying profits.

The UK government designed the Patent Box regime to encourage companies to keep and commercialise their intellectual property in the UK rather than relocating it to other jurisdictions. By offering a considerably lower effective tax rate on profits derived from IP, the government aims to ensure that high-value jobs, research activities and the commercial exploitation of patents remain based in the UK.

The Phased Introduction of Patent Box

Patent Box was introduced in the Finance Act 2012 and became effective for accounting periods beginning on or after 1 April 2013. To avoid a sudden fiscal impact, the government phased in the full benefit over a five-year period. Companies could not access the full 10% effective rate immediately, with the benefit introduced incrementally. The full lower rate benefit became available for companies from the 2017 to 2018 tax year onwards.

With increases to the main rate of Corporation Tax, the significance of Patent Box has grown considerably. From 1 April 2023, the main rate of Corporation Tax increased from 19% to 25% for companies with profits over £250,000, while the Patent Box rate remained at 10%. This widened the potential saving to 15 percentage points for companies subject to the main rate, making Patent Box more valuable for many qualifying companies. According to HMRC’s Patent Box relief statistics, the total value of Patent Box relief is provisionally estimated to have risen to £1.977 billion in 2023/24, up from £1.449 billion in the previous tax year, largely driven by the increase in the main rate of Corporation Tax.

Patent Box does not operate in isolation. It works in conjunction with R&D Tax Credits, and together the two reliefs form a framework designed to reward UK companies throughout the full innovation lifecycle, from the costs of developing new technology through to the profits generated from commercialising it.

Our team of R&D tax credit specialists can review your business activities and determine if you qualify for R&D tax relief.

What qualifies for Patent Box Tax Relief?

How Do Businesses Qualify for Patent Box?

Not every company holding a patent will automatically be entitled to claim Patent Box Tax Relief. Several qualifying conditions must all be satisfied before a company can elect into the regime.

To use the Patent Box regime, a company must:

  • Be liable to UK Corporation Tax: Only companies subject to Corporation Tax in the UK are eligible. Sole traders, partnerships, and non-resident companies not subject to UK Corporation Tax cannot claim.
  • Profit from exploiting patented inventions: A company must make profits from qualifying patented technology, this does not have to be technology it invented itself. If the company has a licence to use another company’s patented technology, it may still qualify. A product may only need one patented component for its revenue to fall within the Patent Box regime, and patented processes can also qualify.
  • Own the qualifying patents or hold an exclusive licence over them: Patents must be granted by the UK Intellectual Property Office (UK IPO), the European Patent Office (EPO), or the patent offices of the following countries within the European Economic Area:

Austria, Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden.

Patents granted outside these jurisdictions do not qualify for the UK Patent Box regime. If the company holds an exclusive licence rather than owning the patent, the licence must give it strong rights over the patented invention. This usually means the right to develop, use and protect the invention across at least one whole national territory. The company must also be able to take action against infringement or be entitled to most of the damages awarded from a successful claim.

If the company is part of a group, extra conditions can apply. The group company must be actively involved in managing or exploiting the patented invention, rather than simply holding the patent passively.

  • Have undertaken qualifying development on the patents: The company, or another group company, must have made a significant contribution to creating or developing the patented invention, or a product that uses it. In practice, this means there must be qualifying R&D activity linked to the relevant patent income, so the relief supports genuinely innovative companies rather than businesses that simply acquire patents to access a lower tax rate.

Qualifying Income for Patent Box

It is important to understand precisely what income qualifies under the Patent Box regime, as this forms the basis for calculating the available relief. Income eligible for Patent Box must relate to the exploitation of patented inventions.

The following income streams qualify:

  • Products incorporating the patented invention, including bespoke spare parts manufactured for those products.
  • Licensing out patent rights to third parties.
  • Selling patented rights.
  • Infringement income, as well as damages, insurance, or other compensation related to patent rights.

Companies in manufacturing and service sectors can also generate qualifying income where they manufacture using a patented process or provide a service using a patented tool. In those circumstances, a notional royalty can be treated as IP income for Patent Box purposes.

However, not all income generated by a company holding patents will qualify. There is income that does not attract Patent Box relief, including:

  • Income from regular activities that would be earned regardless of the existence of patent rights, sometimes referred to as the routine return.
  • Income from marketing asset returns, which represents returns attributable to branding, customer relationships, and other marketing-related intangible assets, rather than the patented technology itself.

The distinction between qualifying and non-qualifying income requires careful analysis to ensure that only the appropriate portion of profits is entered into the Patent Box calculation.

For support in understanding whether your company’s income qualifies for Patent Box relief, and whether your business can take advantage of any tax relief, speak to one of DS Burge & Co’s expert tax advisers.

How to Elect into the Patent Box and Claim Tax Relief?

To benefit from the reduced 10% effective rate of Corporation Tax, companies must make a formal election into the Patent Box regime. Patent Box is not applied automatically, and HMRC will not grant the relief unless an election has been made.

An election can be made either:

  • As part of the tax calculations submitted with a Corporation Tax Return
  • Separately, in writing to HMRC

There is no prescribed form of words required for the election, and no specific box to tick on the Corporation Tax return. The election must be made within two years of the end of the accounting period in which the relevant Patent Box profits and income arose. Missing this two-year window means the opportunity to claim relief for that period is permanently lost.

How Patent Box Claims Worked Before July 2016

Before July 2016, the process for claiming Patent Box relief was less complex. Companies could either separate qualifying IP income from other income, known as the streaming approach, or use a simpler formula based on their overall turnover and profits.

The old rules also did not require companies to show a direct link between their R&D activity and the IP income benefiting from Patent Box. As a result, some companies could access the full 10% effective rate even where patents had been acquired, or where R&D had been carried out by connected parties overseas. This was one of the reasons the regime was later changed.

The 2016 Changes and the Mandatory Application From July 2021

Following a 2015 review by the Organisation for Economic Co-operation and Development (OECD), the UK government introduced changes to the Patent Box rules from 1 July 2016. The aim was to ensure that companies could only benefit where there was a clear link between their R&D expenditure and the IP income receiving the relief.

At first, the new rules only applied to companies electing into the Patent Box on or after 30 June 2016, or to new patents acquired after that date. From 1 July 2021, the new rules became mandatory for all companies in the regime.

Changes to Claim: The R&D Nexus Fraction

The most significant change to Patent Box is the requirement to calculate and apply an R&D Nexus Fraction. From 1 July 2021, this fraction must be calculated by every company within the Patent Box regime, making the process more complex than the original approach.

The Nexus Fraction process requires companies to:

  • Identify and stream IP income: Rather than treating all qualifying income as a single pool, companies must separate income into distinct streams based on individual patents or groups of related patents and processes.
  • Calculate the R&D Nexus Fraction for each stream: This fraction measures how much of the relevant R&D was carried out by the company itself, or by unconnected third parties. A 30% uplift is applied to certain qualifying R&D costs. The fraction may be reduced where the company has bought the IP rights or paid connected parties to carry out the R&D. Where the company has carried out the relevant R&D itself, the Patent Box deduction will often be unrestricted.
  • Apply the fraction to the relevant IP profits: To determine the proportion of profits that can benefit from the lower 10% effective rate.

For accounting periods on or after 1 July 2021, the fraction is calculated cumulatively, incorporating all relevant expenditure from 1 July 2016 to the end of the current accounting period.

Whilst the Nexus Fraction adds administrative complexity, it is essential for any company holding qualifying IP to understand and apply it correctly. Errors in the calculation can result in either underclaiming relief or, more significantly, an overclaim that could trigger an HMRC enquiry.

DS Burge & Co can help with applying the R&D Nexus Fraction to your business’s IP profits, as well as preparing and filing your Corporation Tax Return. 

Need Help Claiming Patent Box Tax Relief?

At DS Burge & Co we offer business tax advice, uniquely tailored to you.
Contact Us

Do R&D Tax Credits Work with Patent Box Tax Relief?

A common misconception is that companies must choose between claiming R&D Tax Credits and electing into the Patent Box regime. In practice, the two reliefs are designed to work together, and claiming both simultaneously can deliver significantly greater tax benefits than either relief in isolation.

The two reliefs serve distinct purposes and target different stages of the innovation journey. R&D Tax Credits provide tax relief, and in some cases a payable credit, based on a company’s qualifying R&D expenditure. The relief rewards the costs of developing and improving new technologies, products, processes, or services, helping companies to fund ongoing innovation.

Patent Box, on the other hand, provides a lower effective tax rate on the profits generated from qualifying patented IP, rewarding the successful commercialisation of that innovation rather than the cost of creating it.

Together, they create an end-to-end incentive for the UK innovation lifecycle. R&D Tax Credits help to fund the research and development phase, while Patent Box reduces the Corporation Tax payable on the profits that result once that innovation reaches the market.

The benefits of claiming both reliefs simultaneously:

  • Increased cash flow and profitability: R&D Tax Credits can provide a cash injection during the development phase, while Patent Box reduces Corporation Tax paid on resulting profits, maximising the overall financial return on investment in innovation.
  • Encouragement to invest further in innovation: Lower upfront costs through R&D relief and reduced tax on profits that follow enable companies to reinvest in future projects, creating a compounding cycle of innovation and tax efficiency.
  • A stronger reputation for innovation: Holding patents and actively claiming the associated tax reliefs demonstrates a genuine commitment to research and technological advancement, which can strengthen relationships with investors, clients, and business partners who value innovation as a marker of long-term quality and ambition.

For further information on how your company can benefit from R&D Tax Credits alongside Patent Box, visit DS Burge & Co’s dedicated R&D Tax Credits page.

Conclusion

Patent Box Tax Relief is one of the most generous tax incentives available to UK businesses that hold, exploit, or exclusively license qualifying patents. With the main rate of Corporation Tax now at 25% and the Patent Box rate remaining fixed at 10%, the potential saving on qualifying profits makes it more valuable today than at any point since the regime was first introduced in 2013.

The interaction with R&D Tax Credits adds a further layer of opportunity, allowing innovative companies to reduce both the cost of developing IP and the tax payable once it has been successfully commercialised. Ensuring your company is taking advantage of the Patent Box regime and additional R&D credits is vital to improving the overall profitability of your company.

However, the process for correctly claiming Patent Box Tax Relief and the requirement to utilise the R&D Nexus Fraction when calculating income streams have added a layer of complexity to the process. It is more important than ever to seek expert guidance and support when seeking to adopt Patent Box Tax relief. 

If you are unsure whether your business qualifies for the Patent Box, or if you need expert assistance calculating your R&D Nexus Fraction and identifying your qualifying profits, speak to DS Burge & Co’s business tax advisors for expert guidance.