The Patent Box aims to provide a tax incentive for companies to develop and commercialise patents and patented products.

Under the Patent Box Rules, companies may, from 1 April 2013, elect to tax trading profits from patents and certain other forms of qualifying intellectual property (IP) from at a lower than standard rate of corporation tax. Eventually, the lower Patent Box rate will be 10%, but the measures are being phased in over a five year period.  

Profits subject to the Patent Box include all profits from the sale of items including patents, less “routine profits” and profits attributable to brand value. 

Companies wishing to take advantage of the Patent Box should consider what they can do to maximise the benefits of the new rules, including identifying all their qualifying patents and any sales relating to them, or even take the opportunity to change the way they hold their IP to make sure they do so in a more tax efficient way.

Which IP rights can qualify?

The Patent Box covers patents granted by the UKIPO, the EPO and certain other EEA states with similar examination and patentability criteria as the UK.

Although this does not include US patents, sales of products in the US which are otherwise qualified may be included in the calculation of “Relevant IP income” for the purposes of seeking relief.

The Patent Box will also apply to SPCs,  plant breeders’ rights, plant variety rights, and certain marketing exclusivity rights and regulatory data protection rights.

The regime will apply from the date of grant of the patent. Profits earned while a patent is pending, up to a maximum of 6 years before the date of grant, are covered although the benefit must be taken in the accounting period of the grant.  Qualifying Company

A company may benefit from the Patent Box if it is liable to UK corporation tax and owns (ie holds legal but not beneficial title) or exclusively licenses certain qualifying IP rights. 

It is limited to companies and groups which have been involved in the innovation or development and as such meet the ‘Development Condition’.

Group companies are also required to meet the “Active Ownership Condition” which, in the case of companies that do not themselves meet the Development Condition, requires them to demonstrate that they play an active role in managing the qualifying IP.

The company must elect to benefit from the Patent Box, either in the computations accompanying the tax return or separately, in writing, within two years after the end of the accounting period in which the relevant income arose.

Exclusive License

In order to benefit from the Patent Box, a company must either hold the qualifying IP or be an exclusive licensee of such IP.  This requires the licensee:

• to enjoy a right or rights to the exclusion of all other persons (including the owner of that right) throughout at least an entire national territory; and

• to be able either to bring infringement proceedings without the consent of the owner or to be entitled to most of the damages awarded in successful proceedings.

The exclusivity must relate to a whole territory, but may relate to one of a number of fields of use.  The exclusive relationship between unrelated parties must be spelled out, but the rules are more relaxed for intra-group arrangements.

Development Condition

To qualify for the Patent Box, the company must meet the qualifying development condition as follows:

• creating, or significantly contributing to the creation of, the patented invention; or
• performing a significant amount of activity to develop the patented invention, or any product, item or process incorporating the patented invention.

“Significance”  is determined in light of all relevant circumstances and actions such as costs, time or effort incurred. Inventing,  testing the viability or usefulness, or developing applications could all meet the development condition, as may commissioning external research to develop a patented invention.  The following will not suffice:

• simply patenting acquired rights;
• marketing an already developed product; or
• simply commercialising a fully developed patent, product or process.

The Development Condition is most clearly met when the company that owns or exclusively licenses the patent carries out the development on its own account but can also be satisfied where another group company undertakes the development. 

Active Ownership Condition

To ensure that companies qualifying for the Patent Box are not merely passive IP holding companies, where a company has not met the Development Condition on its own account (i.e. where it is in a group and the group company meets the Development Condition), it must show that it is actively managing its IP. If the company does not meet this Active Ownership Condition, it will not be a qualifying company.

This means formulating plans and making decisions in relation to the development and exploitation of the rights.
As for the Development Condition, whether actions will count as significant will depend on the relevant circumstances, taking into account the resources of the company and breadth and depth of responsibility for IP exploitation.

Patent Box Calculations

Broadly speaking, it is necessary to undertake the following steps to calculate the profits that qualify for the Patent Box (the relevant IP profits):

Step 1 – Calculate total gross income of the trade for the accounting period.
Step 2 – Calculate the relevant IP income (“RIPI”), which has to fall within 5 heads:

• Sales Income;
• Licence Fees and Royalties;
• Proceeds from sale or other disposal of a qualifying IP right;
• Infringement Income;
• Damages, insurance and other compensation receipts; and must not comprise excluded income (ring fenced oil related income and income attributable to non exclusive licences).

Notional Royalties can be included where patents are used in processes that create non-patented products or to provide services.

Where items which would give rise to RIPI are sold together with other items as part of a single unit and/or for a single price, an apportionment between qualifying and non-qualifying elements is made, on a just and reasonable basis.

Step 3 – Calculate the profits to be taken into account by taking a percentage of total profits of the trade (subject to certain specific adjustments). The percentage is based on the ratio of relevant IP income to total gross income of the trade.

Step 4 – Deduct the “routine return figure” by stripping out “routine profits” (essentially, those that would have been expected to make without the IP). This mark-up is apportioned and stripped out of the Patent Box to leave “qualifying residual profit” or “QRP”.

Step 5 – Deduct the marketing assets return, that is, profits attributed to branding. Small companies may elect instead to calculate the small claims amount and simply reduce their IP profit to 75% of QRP. Non-small qualifying companies may elect to forgo small claims treatment (for example because they feel their brand is worth less than 25% of profits) and must calculate a ‘notional marketing royalty’ (ie the amount they would have had to pay a third party to exploit the relevant marketing assets). An adjustment to QRP is made if the notional marketing royalty varies from any actual marketing royalty.

Additionally some companies may have to adjust the final figure produced at Step 5 by any adjustments elected to be made in respect of profits arising before the grant of the patent.

Once the marketing return is deducted from the QRP, the figure remaining is the amount ‘in’ the Patent Box.


Companies may be able to elect not to use the above mechanical approach. Instead they can elect (if they have the systems to capture the data) to use actual data to identify which costs are allocated against the Patent Box and which are not (streaming).

Streaming is compulsory in certain circumstances, for example, where the total gross income of a trade includes a substantial amount of licensing income that is not RIPI or when the gross income of a trade includes a substantial amount of credits brought into account for computing the profit of trade but not fully recognised as revenue in accordance with GAAP.

Applying the Patent Box Rate

Rather than applying the 10% rate directly to the profit within the Patent Box, a deduction is taken from the profits of the trade chargeable to corporation tax.  Assuming a 22% corporation tax rate, the deduction would be equal to:

RIPI x (22% - 10%)/22%

Patent Box Losses

If any one trade produces a negative amount of relevant IP profit (a relevant IP loss) there is a process of offsetting losses.


The definition of group under the regime is drawn more widely than for general corporation tax purposes.


There are a number of anti-avoidance measures within the regime. One seeks prevent commercially irrelevant but exclusive rights being conferred under a licence in order to ensure that income granted by the licensee qualifies for the Patent Box.

Another seeks to prevent a patented item being incorporated into a product in order to make income from the sale of that product RIPI.

The main anti-avoidance rule applies where a company which is entitled to receive a benefit from the Patent Box regime is party to a scheme, one of the main purposes of which is to obtain a relevant tax advantage. 

Timing of Election

Even when a company has concluded that it will be beneficial to elect into the Patent Box regime, it may be worth considering the timing of such an election.

Practical Considerations

Companies will need to determine which of their patents qualify for the Patent Box and whether and to what extent such patents either cover inventions incorporated into products or are licensed. Where a company holds only one or two patents this will be straightforward. However, where a company or group has a large portfolio of patents granted by different patent offices worldwide, this may take some consideration.

Moreover, patents have not traditionally formed a significant part of some industries’ IP protection strategies (e.g. IT, software) because of uncertainties over whether their products qualify for patent protection or perceived difficulties in enforcement. Such industries may want to revisit the issue should they want to take advantage of the relief available through the Patent Box.

Other items in the Patents Update newsletter for January 2013:

> China: Two recent Supreme Court decisions open up greater possibilities for amendment of Chinese patents

> England: The PCC - A review of the first four patent cases to come to trial in the PCC

> EU: Unitary Patent Regulation and Unified Patent Court Agreement; An update

> Germany: "Customary usage in the trade" gains importance in determining infringement in repair/reconstruction cases

> Germany: Stay of first instance infringement decisions in standard essential patent actions

> Holland: Cross-border patent litigation revival 'Solvay vs Honeywell'

> Spain: Some interesting peculiarities of Spanish Utility Models

> England: The Patents Court exercises its jurisdiction to grant a pan-European declaration of non-infringement

> England: Patent litigation statistics for 2011 and 2012