Many businesses hold valuable intellectual property (IP) but fail to make the most of it. For those that do, the Patent Box scheme can be hugely beneficial, reducing corporation tax on qualifying profits from 25% to 10%. However, making a successful claim is not always straightforward. When the rules are complex, mistakes can lead to missed opportunities, HMRC challenges, and costly repayments. If you’re planning to elect into the scheme, understanding the common pitfalls is essential.
Misidentifying qualifying IP
Not all IP meets the legal criteria to be eligible for the patent Box scheme. It is designed primarily for granted patents. Common errors include trying to claim relief on trademarks, copyrights, or trade secrets. None of which are eligible. Doing so can trigger HMRC investigations, penalties, and demands for repayment.
Applying incorrect profits
Even with eligible IP, not all company profits will qualify. This is often where the most significant errors occur due to the complex “streaming” rules. Qualifying income typically includes:
- Sales of patented products
- Sales of products incorporating patented processes
- Income from licensing out patents
- Damages for patent infringement
- Sales of patented articles
Once identified, this income must be used to calculate the eligible profit according to HMRC’s rules.
Overlooking the streaming requirement
The most complex aspect of Patent Box, HMRC requires companies to correctly track and attribute the income to the patented invention. Businesses must:
Identify all income streams
And separate qualifying from non-qualifying income.
Allocate expenditure
Direct and indirect costs must be proportionally split between patented and non-patented products. This means you need accounting systems that can separate costs related to patented products from non-patented costs.
Deduct routine return
Routine return is the profit a business would have made without its IP, such as labour, materials and overheads. To find the profit tied to the IP, you must deduct this routine return from the total profit. This prevents you from incorrectly claiming the 10 percent rate on profits that are not linked to your invention.
This is usually calculated using a standard mark-up percentage for that company, which can vary by industry. The formula for this is:
Routine Return = Routine Costs × (1 + Standard Markup Percentage).
For instance, if a construction company had Routine Costs of £1m, and a 20% mark up, their Routine Return would be £1m x (1 + 0.20) = £1.2m.
Deduct the marketing asset return
Removing any profit linked to brand value rather than the invention. If you benefit from brands or other marketing assets, the profit attributable to these must be removed. Patent Box is for technological innovation, not brand value.
Apply the Nexus fraction
The nexus fraction links the beneficial tax rate on relevant IP income to the research and development (R&D) expenditure incurred by the company. If a significant amount of R&D was outsourced, the benefit will be reduced. Accurate tracking of R&D costs by project is crucial for this.
Poor record-keeping and documentation
HMRC requires detailed evidence linking profits directly to patented inventions, the Patent Box regime is highly prescriptive and subject to intense scrutiny from HMRC. Key records, such as proof of granted patent and allocated costs and expenses, must be included. Without detailed records, a valid claim can be challenged, delayed, or outright rejected. A dedicated IP register and segregated accounting make this process far smoother and reduce the risk of disputes.
Ignoring changes in legislation or HMRC guidance
Patent Box has evolved significantly. Businesses that don’t stay up to date risk making non-compliant claims or missing out on opportunities.
For example:
- 2021 – Mandatory streaming and the nexus fraction introduced
- 2023 – Corporation Tax increased to 25%
Regular reviews of HMRC guidance are essential.
Public disclosure before patent filing
If your invention was publicly disclosed before filing the patent application, your ability to claim Patent Box is jeopardised. Unlike some other countries, the UK has strict requirements with no grace period. This means you must file your patent before you go public with your invention. Failing to file before unveiling your invention may reduce your chances of claiming.
Inadequate Patent Box advice
Choose an adviser who works closely with you to identify and implement every available opportunity for Patent Box. A skilled adviser will collaborate with both you and your patent attorney to thoroughly review R&D tax credit claims, ensuring full compliance and accurate reporting for all Patent Box calculations. Some advisers also offer a Patent Box refresh service that ensures your claims are fully up to date with the latest legalisation, providing you with full confidence in your claim.
Understanding common mistakes that can arise from Patent Box is a practical first step in the claim process. However, partnering with a trusted adviser is highly recommended. Proper planning and detailed knowledge of Patent Box will allow your business to benefit from the scheme while navigating HMRC’s requirements with confidence.
