Patent Box

Patent Box — 10% Corporation Tax Rate on IP Profits

Offers United Kingdom innovation firms an improved tax route on qualifying intellectual property income.

Patent Box is an HMRC elective scheme that reduces the Corporation Tax rate on profits derived from qualifying patents to 10%, compared with the 25% main rate in force since 2023. Companies do not apply to HMRC for approval; instead, they elect into the scheme on their Corporation Tax computation or in a separate written election submitted within two years of the end of the relevant accounting period. The election is irrevocable once made for that period, and missing the two-year window permanently forfeits Patent Box benefit for that accounting period. The scheme was introduced in phases between 2013 and 2017 and has been stable since. The 10% rate is achieved through a deduction in the Corporation Tax computation rather than a separate tax rate — the effective outcome is a 15-percentage-point reduction in the rate applied to relevant IP income.

Qualifying patents must be granted by the UK Intellectual Property Office, the European Patent Office, or one of 13 named EEA national offices (Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, Sweden). Post-Brexit, UK-retained EPO patents continue to qualify. The company must own the patents or hold an exclusive licence, and must have undertaken qualifying development — meaning it made a significant contribution to the creation of the invention or to a product incorporating it. Income sources that qualify include sales of patented products, licensing royalties, sales of patent rights, infringement and damages income, and a notional royalty applied where the company uses a patented process or tool internally without a separate licensing transaction.

For patents first elected after 30 June 2016, nexus rules apply under the OECD BEPS framework: a streaming method must be used to identify qualifying IP income, and an R&D fraction is applied to restrict the benefit proportionally where the company paid acquisition costs for patents or made R&D payments to connected parties. Where all R&D was conducted in-house or via third-party subcontractors and no acquisition expenditure was incurred, the R&D fraction equals 1 and no restriction applies. Group companies can benefit where an entity holds an exclusive licence across an entire national territory, provided it actively owns the patents and plays a significant role in managing the IP portfolio. Companies in HMRC Large Business should engage their customer compliance manager early.