Patent Box

The Patent Box is a special Corporation Tax incentive designed to encourage companies to keep and commercialise intellectual property in the UK. It allows companies to apply a lower effective rate of Corporation Tax to profits earned from its patented inventions. Companies must elect into the Patent Box to benefit from the reduced rate. 

The Patent Box seeks to encourage innovation by rewarding companies that invest in developing new, innovative, and patented products and processes. It also seeks to promote commercialisation by providing a financial incentive for companies to bring their patented inventions to market and commercially exploit them within the UK.

In addition, the Patent Box aims to attract IP to the UK by incentivising companies to locate the high-value jobs and economic activity associated with the development, manufacture, and exploitation of patents within the UK.

In 2016, the Patent Box regime came under scrutiny by the OECD due to concerns being raised under the Base Erosion and Profit Shifting (BEPS) project, which focused on harmful tax practices. Prior to 2016, the UK’s Patent Box did not require a strong link between where the R&D was conducted and where the patent profits were taxed. To address this, the ‘Modified Nexus Approach’ was introduced from 1 July 2016 and became mandatory for all claimants from 1 July 2021. This regime requires a direct link between the R&D activities undertaken by the company and the tax benefit claimed.

Further reading

• GOV.UK — Use the Patent Box to reduce your Corporation Tax on profits

• HM Treasury and HM Revenue and Customs — The Patent Box

• OECD — Action 5 Agreement on Modified Nexus Approach for IP Regimes