The Patent Box is a UK corporation tax relief that reduces the effective rate on profits from patented inventions to 10%. Combined with R&D tax credits, it forms the second half of the UK government’s incentive package for innovative companies — rewarding successful commercialisation of intellectual property rather than the research that created it. It sits alongside the other reliefs covered in our tax and VAT guides and is most valuable for businesses that earn meaningful income from a granted patent.
Who can claim
To benefit from the Patent Box, a company must:
- Hold or exclusively license a qualifying patent
- Be a UK Corporation Tax payer
- Have developed the patented invention or product (development condition)
- For groups, satisfy the active ownership condition
Qualifying IP includes patents granted by:
| Office | Qualifying |
|---|---|
| UK Intellectual Property Office (UKIPO) | Yes |
| European Patent Office (EPO) | Yes |
| Designated EEA states | Yes (specified list) |
| US Patent and Trademark Office | No |
| Other non-EEA offices | No |
Plant breeders’ rights and certain medicines/pesticides regulatory data also qualify.
The streaming calculation
Patent Box income is computed using a streaming approach — separating relevant IP income from other income — and adjusted by the nexus fraction introduced by the OECD’s BEPS Action 5.
| Step | Calculation |
|---|---|
| 1. Identify relevant IP income | Worldwide income from qualifying IP |
| 2. Deduct routine return | 10% of certain expenses |
| 3. Deduct marketing asset return | Brand value share |
| 4. Apply nexus fraction | Qualifying / total R&D expenditure |
| 5. Apply Patent Box deduction | (Profit × (Main rate – 10%) / Main rate) |
The deduction effectively brings tax on qualifying profits down to 10%, well below the main corporation tax rate. The nexus fraction is the key restriction: it limits relief in proportion to the qualifying R&D the company carried out itself. Outsourcing development to connected parties or simply acquiring the patent reduces the fraction and, with it, the benefit.
Worked example (illustrative)
A company with £2m of qualifying IP profits and a nexus fraction of 0.95 at the 25% main rate:
- IP profit eligible for relief: £2m × 0.95 = £1.9m
- Patent Box deduction: £1.9m × (25% − 10%) / 25% = £1.14m
- Taxable profit reduced from £2m to £860k on this stream
- Tax saving versus 25%: £285,000
Practical steps
- Elect into the regime within two years of the end of the relevant accounting period
- Keep a streaming workbook linking patents to product income
- Track R&D expenditure by patent family for nexus
- Pair the Patent Box claim with R&D tax credits for the same activity
- Provide documentation supporting the development condition
- Reflect the relief on the CT600 corporation tax return
Final thoughts
Patent Box claims need front-loaded record keeping, but the long-term tax saving is substantial for IP-heavy businesses. Because relief is tied to a granted patent, plan the election and streaming records from day one of commercialisation rather than scrambling at filing time. Pair this with our R&D tax relief for small businesses guide, the transfer pricing rules for UK companies explainer, and the wider tax and VAT guides for the full corporation tax picture. The HMRC Patent Box Manual is the authoritative reference. See pricing for project accounting and timesheets that show where IP income and costs arise.