Sure, innovation drives growth, but how many businesses truly reap the rewards of their intellectual property? While the Patent Box scheme offers this opportunity for businesses, it can often feel confusing and leave you wondering what you’re eligible for. With this in mind, we’ve put together seven points about the Patent Box scheme that you might have missed in the usual guides.
1. Loss making companies can still claim Patent Box
The Patent Box scheme allows companies to apply a reduced Corporation Tax rate to profits derived from patented products, but what happens if there’s no profit? Even if a company is currently operating at a loss, it can still benefit from the Patent Box if it anticipates future profitability. In some cases, a company might generate a Patent Box profit while still experiencing an overall tax loss. This scenario could result in a larger trading loss to offset against future profits.
If a company incurs a Patent Box loss, it may be wise to delay making a claim until a Patent Box profit arises. This is because once a claim is made, the company is considered to have elected into the scheme. While it is possible to opt out, re-entering is not allowed for five years. Consulting a specialist advisor is essential to fully understand the practical implications. Nonetheless, the reduced Corporation Tax rate on qualifying profits serves as a strong incentive for continued investment in R&D and the development of innovative products.
2. Patent box can be applied to your patent pending period (up to six years)
Once your patent is granted, you can claim Patent Box benefits retroactively for up to six years during which the patent was pending. For example, if your patent application was filed in 2019 and approved in 2025, providing you have made an election in to the Patent Box regime during the pending period, you can claim relief for the six year pending period as part of your 2025 claim.
Patent Box relief can be applied retrospectively to profits generated before the patent was officially granted. Companies can claim this relief by notifying HMRC through an election in their corporation tax return. This election can be made or amended within a two-year deadline from the end of the accounting period.
For instance, if your company generated profits from a patented product in the 2022/23 financial year but didn’t initially elect into the Patent Box scheme, you have until the end of 2025 to amend the return and claim relief for those profits.
3. Patent Box includes patents from countries outside the UK
The scheme has been generously designed to include patents registered outside of the UK Intellectual Property Office. Patents granted by the European Patent Office (EPO) are also eligible for the scheme. The EPO issues European patents that can be validated in multiple European Economic Area countries. So long as the patents are granted by the EPO and are used within the UK, the profits derived from these patents can qualify for the reduced tax rate under the Patent Box regime. Countries within the European Economic Area that qualify include: Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, and Sweden.
4. An exclusive licence to sell a patented product still qualifies for the relief
The good news is that even if a company doesn’t have its own patent, it may well still be eligible. Patent Box is open to anyone who holds an exclusive licence to a patent, it’s not just for patent owners. For instance, patents that have been handed over by another company, before being actively developed or managed by the acquiring company can be eligible for Patent Box.
5. You don’t need to patent an entire product to qualify
Patent box qualification isn’t based on whole products or processes being patented. Instead, you can patent a specific component of your product or part of your process, and the profits from this can qualify for the scheme’s benefits. By targeting key elements of your product or process for patent protection, you can still enjoy the financial benefits of the scheme while saving time and money on developing a full-scale product.
6. You can claim both Patent Box & R&D Tax Relief at the same time
Are you looking to double down on tax relief? Patent Box calculation considers the relevant IP income and profits, as well as any funds allocated for R&D expenditure. Since Patent Box is not considered state aid, R&D Tax Credits can also be claimed so the schemes can be used side by side. In fact, companies that have invested time and resources into qualifying R&D and hold eligible IP can benefit significantly from using both tax relief schemes together.
7. Patent Box now requires a direct link with R&D
Since July 2021, the Patent Box scheme has introduced a new rule. To qualify for tax relief, companies must now show a direct connection between the research and development (R&D) activities that led to their patents and the profits those patents generate. This change aligns the UK’s Patent Box with global standards, ensuring that tax benefits are only granted when there’s a clear link. This is known as the “nexus” between innovation and income. It means your company needs to not only hold patents but also prove that your R&D efforts directly contributed to their creation and the resulting profits.
We hope these insights have given you a clearer understanding of the Patent Box scheme and how it could benefit your next claim. Remember, if you need any assistance or have questions, please reach out to our team. We’re here to help you make the most of your innovations.
