UK Patent Box Regime – Introduction
The UK Patent Box regime, which offers a reduced corporate tax rate of 10% on profits derived from UK or European patents, remains significantly under-utilised by UK companies.
According to the latest available data, only around 1,510 UK companies took advantage of the Patent Box system in the financial year spanning April 2021 to March 2022.
This figure is starkly low when compared to the 4.7 million incorporated companies registered in the UK as of 31st March 2021—a number that includes those in the process of dissolution or liquidation.
To put this into perspective, out of approximately 4.4 million active companies at the time, a mere 0.03% are benefiting from this lucrative scheme.
What is the Patent Box?
The Patent Box regime is designed to complement existing incentives that provide corporate tax benefits for research and development (R&D) expenditures.
While R&D tax relief supports companies with the upfront costs of qualifying R&D activities, the Patent Box provides ongoing tax relief for businesses that choose to retain and commercialise their innovations within the UK.
Together, these regimes aim to support the entire innovation lifecycle for UK businesses.
One possible reason for the low uptake could be the confusion between the Patent Box and the more widely used R&D tax credit scheme.
While both offer significant financial benefits, they serve different purposes and can be utilised in tandem to maximise tax relief.
As the numbers show, there is a clear opportunity for more UK companies to explore the advantages of the Patent Box and reduce their tax liabilities.
Who Can Benefit from the Patent Box?
The Patent Box regime is available to all companies, regardless of industry. To qualify, a company must meet the following criteria:
- Ownership of a Qualifying IP Right (QIPR): The company must hold a granted patent or an equivalent right, or have an exclusive licence to such rights. Companies involved in cost-sharing arrangements for accessing QIPRs can also qualify.
- Development Condition: The company must have played a role in the development of the patented technology, either directly or through another group company.
- Active Ownership Condition: If the company is part of a group, it must demonstrate active management in the exploitation of the QIPR or exclusive licence.
Calculating the Patent Box Benefit
The first step in calculating the benefit under the Patent Box regime is to determine how a company’s QIPR maps to its qualifying income, which can include:
- Sales of products and bespoke spare parts
- Royalties, milestones, and licence fees
- Proceeds from patent sales
- Compensation payments, such as damages for patent infringement
- Income from services or patented processes, calculated using transfer pricing principles
Finance income is excluded from the regime.
Once the qualifying income is identified, further adjustments are made to calculate the profit attributable to the QIPR, which is then eligible for the reduced 10% tax rate.
Recent Changes to the Patent Box Regime
From 1 July 2016, significant changes were introduced to the Patent Box regime, impacting all new claimants from that date.
These changes require companies to demonstrate a clear link or “nexus” between their R&D activities and the tax benefits derived under the Patent Box.
This means that companies need to track and report relevant R&D expenditures alongside their Patent Box claims.
For companies operating under the previous regime, “grandfathering provisions” allowed them to continue under the old rules until 30 June 2021.
After this date, all claimants must comply with the new rules, necessitating the tracking and tracing of R&D expenditures from 1 July 2016 onward.
UK Patent Box – Conclusion
The UK Patent Box regime offers a valuable yet under-utilised opportunity for companies to significantly reduce their corporate tax rate on profits derived from patented innovations.
With only a fraction of eligible businesses currently benefiting from this regime, there is a clear need for greater awareness and understanding of how it can complement existing R&D tax reliefs.
By proactively assessing eligibility, optimising claims, and ensuring compliance with the latest rules, companies can unlock substantial tax savings and support their long-term innovation strategies.
The potential benefits are too significant to overlook, making it essential for more businesses to explore and take advantage of the Patent Box regime.
Final thoughts
If you have any queries about the UK Patent Box, or UK tax matters in general, then please feel free to get in touch.