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Patent Box | What Is It & How Do I Qualify?

The government runs two schemes; R&D relief and Patent Box, designed to encourage growth and business involvement in industries and sectors critical to innovation.

Both schemes can yield serious tax benefits for many businesses and they’re often underutilised. By reducing the tax on certain business profits and R&D investment or expenditure, the government hopes to stimulate businesses that contribute innovative projects to the economy.

Is Patent Box Relief Different to R&D Credits?

Yes, these are two different schemes broadly targeted at similar businesses. Patent Box takes into account R&D but focuses on income generated from patents, whereas R&D credits are tax credits granted on R&D investment costs.

R&D Relief and Patent Box Relief

The first, more traditional scheme is the R&D relief scheme or R&D tax credits. R&D tax relief is granted to businesses that are developing new products or are enhancing products across eligible sectors and industries. Many registered UK corporations can claim R&D tax relief provided that they’ve spent money on research and development. Most sectors are covered ranging from mining to financial to creative, gaming and even breweries - R&D relief isn’t reserved strictly for technological or financial sectors. SMEs can claim 33p on every £1 spent on R&D. For large companies, this is reduced to 11p. These can usually be claimed for the last two years of accounting.

What is Patent Box Relief?

Patent Box is a newer initiative that rolled out in 2013. Patent Box initiatives are common throughout Europe and they’re also designed to reduce taxation on profits related to areas of innovation. Specifically, Patent Box can reduce corporation tax to 10% on profits earned through eligible patents

Patents eligible for Patent Box can be granted in the UK or in any of the following European countries as well as the European Patent Office:

  • Austria
  • Bulgaria
  • Czech Republic
  • Denmark
  • Estonia
  • Finland
  • Germany
  • Hungary
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Sweden
What Income Does Patent Box Cover?

Primarily income from the patented designs or patent-protected products themselves. The whole product will not need to be patented, small components of it may be eligible for Patent Box, thus making the entire sale fall within the benefit. Licensing, royalties, and patents used in services and processes can also qualify.

Income from patented physical products is relatively easy to calculate but income from processes and services are much more complex to qualify for Patent Box.

Changes to Patent Box in 2016

In 2016, Patent Box changed to ensure that claimants were carrying out sufficient R&D towards those patents in the UK. This adjustment was made due to fears of companies researching patents in other countries whilst paying reduced corporation tax on UK profits.

Patent box relief qualifiers must now display a ‘nexus’ of links between substantive domestic R&D investment and the profit made on patents covered by Patent Box.

How Can I Claim Patent Box Relief?

Since both Patent Box and R&D relief involve calculations of R&D investment and expenditure, it’s often straightforward to apply for both at the same time. Our free guide on R&D tax relief contains all you’ll need to know about it and how to start claiming.