Key facts
- The Patent Box applies an effective 10% CT rate to qualifying patent profits (vs the standard 25%).
- The company must own or exclusively license a qualifying patent.
- You must elect into the regime — it does not apply automatically.
- A nexus fraction limits the relief to profits attributable to R&D done by the claimant.
- The election applies to all qualifying patents — you cannot cherry-pick individual patents.
How the Patent Box Reduces Tax on Patent Income
The Patent Box is a Corporation Tax incentive that allows companies to apply a lower effective tax rate of 10% to profits attributable to qualifying patents. The standard CT rate is 25%, so the Patent Box can deliver significant tax savings for innovative companies.[1]
The relief works by allowing a deduction in the CT computation that reduces the effective rate on qualifying profits. The company pays full CT on non-patent profits as normal.
Qualifying Intellectual Property
Not all IP qualifies. The Patent Box is limited to patents granted by:[1]
- The UK Intellectual Property Office (UKIPO)
- The European Patent Office (EPO)
- Certain other EEA patent offices (Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia, Sweden)
The following do not qualify: trademarks, copyrights, design rights (unless covered by a qualifying patent), and trade secrets.
Supplementary protection certificates (SPCs) and regulatory data protection for pharmaceuticals also qualify, extending protection beyond the patent term where relevant.[1]
Conditions for Claiming
To claim Patent Box relief, your company must:[1]
- Own or exclusively license qualifying patents — a non-exclusive licence is not sufficient
- Have made a significant contribution to the creation or development of the patented invention (the “active ownership” condition)
- Elect into the regime — include the election in the CT600 for the first accounting period you wish it to apply
The election is irrevocable for the period it covers but can be withdrawn for future periods with effect from the start of the next accounting period. You make the election when you submit the company’s CT600 for the relevant period.
The Nexus Fraction
The nexus fraction limits Patent Box relief to profits that are proportionate to the qualifying R&D expenditure the company incurred itself (or through connected subcontractors), compared with total R&D costs. This prevents companies from acquiring patents and claiming the reduced rate without doing the underlying research.[2]
The formula is:
Nexus fraction = (D + S) × 1.3 ÷ (D + S + A)
Where: D = qualifying in-house R&D expenditure, S = qualifying subcontracted R&D to unconnected parties, A = acquisition costs of the IP + connected-party subcontracted R&D.[2]
The 1.3 “uplift” is capped so the fraction cannot exceed 1.0. Companies that do all their R&D in-house will typically have a nexus fraction of 1.0, obtaining the full benefit.
Calculating Patent Box Profit
The profit calculation involves several steps:[2]
- Identify relevant IP income — income from sales of patented products, licence fees, royalties, and embedded patent income
- Deduct routine return — a 10% return on routine expenditure (representing the profit any business might earn without the patents)
- Deduct marketing assets return — profits attributable to brands, trademarks, and customer relationships (not the patent itself)
- Apply the nexus fraction — to arrive at qualifying residual profit
- Calculate the Patent Box deduction — the deduction is the amount needed to bring the effective CT rate on qualifying profits down to 10%
| Step | Amount |
|---|---|
| Total relevant IP income | £500,000 |
| Less: routine return (10% of routine costs of £200,000) | (£20,000) |
| Less: marketing assets return | (£30,000) |
| Qualifying residual profit (before nexus) | £450,000 |
| Nexus fraction (assume 1.0) | £450,000 |
| Patent Box deduction (to reduce rate to 10%) | £270,000 |
Tip: The “small claims treatment” is available to companies with qualifying IP income of £1 million or less. This simplifies the calculation by allowing you to treat 75% of your qualifying residual profit as the Patent Box profit, avoiding the need for detailed routine and marketing return calculations.[2]
Frequently Asked Questions
What is the Patent Box tax rate?
The Patent Box applies an effective 10% Corporation Tax rate to qualifying patent profits, compared with the standard 25% main rate. The relief is given as a deduction in the CT computation.
Which patents qualify for the Patent Box?
Patents granted by the UK Intellectual Property Office (UKIPO), the European Patent Office (EPO), and certain EEA patent offices qualify. Trademarks, copyrights, and design rights alone do not qualify.
What is the nexus fraction in the Patent Box?
The nexus fraction limits relief to profits proportionate to the R&D expenditure the company incurred itself. Companies that do all their R&D in-house typically have a nexus fraction of 1.0, obtaining the full benefit.
Do you have to elect into the Patent Box?
Yes. The Patent Box does not apply automatically — the company must include an election in its CT600 return. The election covers all qualifying patents; you cannot cherry-pick individual ones.
Further Reading
- R&D Tax Relief — claiming relief on the R&D that generates your patents
- The Merged R&D Scheme — the unified R&D credit from April 2024
- Corporation Tax Rates — current main rate and small profits rate
- The CT600 Tax Return — where to elect into the Patent Box
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