How can Patent Box reduce your Corporation Tax?

Patent Box is a generous but underused Corporation Tax relief available to eligible UK businesses. Ian Batkin of Luvo Financial explains what Patent Box relief is, who and what is eligible, and why making a claim is worthwhile.

Patent Box Corporation Tax UK

What is Patent Box? 

The Patent Box is a tax relief that allows companies to apply a lower rate of Corporation Tax to profits earned from its patented inventions. All profits generated from qualifying patents are taxed at a reduced rate of 10 per cent, rather than the usual 19 per cent.

Introduced in the UK in 2013, the chief aim of Patent Box relief is to encourage UK companies to retain and commercialise existing patents in the UK, and to develop new, innovative, patented products and processes. 

Companies must elect into the Patent Box to apply the lower rate of Corporation Tax, which is currently 10 per cent. This relief was introduced in phases from 2013 up until 2017. The rules regarding how to submit a claim were amended in July 2016, and these slightly more complex rules are the ones that businesses are now required to follow. 

Patent Box can be claimed alongside Research and Development tax credits, providing certain qualifying criteria is met.  

Who is eligible to make a Patent Box claim? 

If your business has a patent, or has a patent pending, you could be eligible to claim through Patent Box. Specifically, a company can use the Patent Box if it:

  • is liable to Corporation Tax 
  • makes a profit from exploiting patented inventions 
  • owns or has exclusively licenced-in the patents by the UK Intellectual Property Office or the European Patent Office
  • has undertaken qualifying development on the patents

To benefit, the company must hold and be able to provide evidence of a UK and/or certain European patents; those granted in France, Spain, Italy, USA and Japan are excluded from the scheme. 

Why should you make a claim for Patent Box relief? 

Numerous businesses put patents in place in order to protect their inventions, but a surprisingly large proportion of these are yet to claim Patent Box. This could be for several reasons:  

  • because many businesses are not aware of the relief 
  • because they think that making a claim will be too complicated 
  • because the patent hasn’t yet been granted (and is still pending)  
  • because they believe that the scheme will not apply to them

However, making a Patent Box claim could save your business money. Patent Box currently taxes the profits generated from qualifying patents at a preferential rate of 10 per cent - a significant tax saving when compared to the current rate of Corporation Tax payable of 19 per cent. 

Patent Box is available for every year in which a business holds the patent and generates income from qualifying intellectual property. A UK patent typically lasts for 20 years from the application filing date, meaning the total amount claimed from the relief can add up over the years and be extremely financially valuable. 

Anyone who has applied for a patent will know that it is not cheap. Pulling together an application can take time, may require the involvement of a patent lawyer and often takes several years for a patent to be granted. If you have gone through this process, it’s certainly in your best interests to reap all the rewards that being patent-protected has to offer.   

How do you claim Patent Box relief?

As with all specialist business and corporate tax matters it’s best to seek advice from an adviser who specialises in this area.

Claims for Patent Box relief are made by submitting a CT600 Tax Return and including the details of the claim within or appended to it. This return can be amended or resubmitted for up to two years after an accounting period end. 

The calculation of this relief has become more complex since the 2016 rule changes. Nowadays, calculating the relief requires overall sales and profitability to be streamed, separating the sales and estimated profitability that arise from each patent from the sales and profits from non-patented products. 

A Patent Box professional will carry out a prescriptive multi-step calculation to determine the amount that is available for Patent Box relief.

Ian Batkin Luvo

About the author

Ian Batkin is partner and co-founder of Wolverhampton independent R&D Tax specialists Luvo Financial.

See also

Five tax breaks SMEs can benefit from in the UK

What businesses need to know about auto-enrolment for 2020/21

How will the new IR35 rules affect off-payroll working?

Company profiles

Find out more

Use the Patent Box to reduce your Corporation Tax on profits (GOV.UK)

Claiming Research and Development tax reliefs (GOV.UK)

Corporation Tax for Company Tax Return (CT600 (2020) Version 3) (GOV.UK)

Image: Getty Images

Publication date: 23 September 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.