Brought in by the UK government in 2013, patent box tax relief is a scheme that’s designed to incentivise companies who hold and exploit intellectual property (IP) in the UK. Put simply, it provides qualifying organizations with the opportunity to reduce their tax rate on profits derived from certain patents.

But how does it work in practice? And how do you know if you qualify?

In this guide, we’ll cover these questions and more, providing you with everything you need to know about the patent box tax relief scheme. We’ll also show you what to do if you think you might qualify.

What is patent box tax relief?

The patent box tax relief allows qualifying companies to benefit from a 10% effective tax rate on profits derived from certain patents. This allows for savings of up to 15% as the main rate is currently 25% or 19% for companies with taxable profits under a certain threshold. 

The aim of the relief is to provide an incentive for companies to retain and commercialise existing patents, and to develop new innovative patented products or processes.

Who can claim patent box tax relief?

Patent box is a valuable Corporation Tax relief available to companies holding registered patents or an exclusive licence in respect of such patents. This means that companies can qualify for the patent box tax relief if they either own a registered patent outright, giving them full control over its use, or hold an exclusive license for a patent which grants them sole rights to use or benefit from the patented invention, even if they don’t own it.

Making the patent box tax relief work for your business

The calculation of the patent box deduction is complex and requires detailed record-keeping throughout the relevant periods. You’ll need to keep track of your patent-related income and expenditure, an up-to-date list of patents (both pending and granted), and any R&D spend related to your relevant IP. 

There are also strict deadlines in which you need to elect into the patent box regime and make a claim for the patent box deduction. Typically, a company must elect into the regime within two years of the end of the accounting period in which the relevant income arises.

What’s more, the timing of electing into the patent box regime also requires careful consideration. For example, if a company elects into the regime and the IP is generating losses rather than profits, this can result in an IP loss which then has to be offset against future IP profits, before any patent box relief can be claimed. In other words, it can delay the benefit of the election.

To streamline the entire process, contact a tax adviser. Rickard Luckin can assist with establishing your eligibility, calculating the patent box deduction and making the relevant claims and elections.