You can’t fail to have heard about the new Patent Box regime: advisers like me have been tweeting and blogging about it, the press have been writing about it (often quite negatively), MPs on the Public Accounts Committee have been talking about it and George Osborne mentioned it again in his Budget on 20 March. Which is all well and good but, be honest, are you really comfortable that you know all you need to know about how it could benefit your company?

In this post, I have provided answers to the key questions so that you can make an assessment as to whether Patent Box might be beneficial for your company. This is a long post, there is a lot of information in it. However, it’s a bit like a reference work, you don’t need to read it from top to bottom to get value from it. Please dip in to the sections that deal with the questions you have.

There is a lot of detail in the legislation and, in an attempt to keep the post to a manageable size, I have referenced HMRC’s Patent Box manual for some of the more technical detail.

If you would like more information on the new regime, or would like to discuss how it might benefit your company, please do get in touch by phone (07703 472569) or email

What is the Patent Box?

In a nutshell, it is a reduced rate of taxation (10% instead of the 23% main rate applicable from 1 April 2013) for your profits derived from qualifying patents. Companies with Relevant IP Profits that elect into the Patent Box will, therefore, be able to reduce their corporation tax bill.

Note that the full benefit of the relief is being phased in over five years.

What are qualifying patents?

These are patents granted by one of the following patent authorities:

  • The UK Intellectual Property Office (IPO – used to be known as The Patent Office);
  • The European Patent Office;
  • The patent authority for one of the following countries:
    • Austria
    • Bulgaria
    • Czech Republic
    • Denmark
    • Estonia
    • Finland
    • Germany
    • Hungary
    • Poland
    • Portugal
    • Romania
    • Slovakia
    • Sweden
In addition, certain similar rights relating to human and veterinary medicines, plant breeding and plant varieties, may also qualify (more detail is provided on these in HMRC’s Patent Box manual).

What interest do I need in the patent?

You must either be the legal owner of, or hold an exclusive right over, the patent. Certain other conditions also need to be satisfied, see below.

What is meant by “an exclusive licence”?

For the purpose of the Patent Box, a license must grant exclusivity (even to the exclusion of the legal owner) over one or more rights in the patent in at least one territory. The licensee must either have the right to take infringement proceedings to enforce its rights in the patented invention without involving the legal owner or it must be entitled to receive most of the damages for any infringement.

What are those ‘other conditions’?

As well as owning, or having an exclusive licence over, the patent, the company will need to show that it has carried out “qualifying development” in respect of the patent. This means:
  • creating, or significantly contributing to the creation of, the patented invention; or
  • performing a significant amount of activity to develop the patented invention, any product incorporating the patented invention, or the way in which the patented invention may be applied.
There are four ways in which the development test may be met.
  1. Where a company has itself carried out the qualifying development activity at any time. The company must not have become, or ceased to be, a member of a group since that time.
  2. Where the company has itself carried out the qualifying development activity at any time but it has ceased to be, or has become, a member of group since that time. As long as the company continues with development activity of the same description (although not necessarily on the same invention) for at least 12 months after the date of the change of group status, it will qualify. In addition, it must not leave the group or (as appropriate) become a member of another group in that period.
  3. A company that is a member of a group can qualify if another company in the group has carried out the qualifying development activity whilst it was a group member.
  4. A company that is a member of a group can qualify if another company (“T”) that is, or was, a member of the group, carried out the qualifying development activity. T – or a third group company that has taken over the trade carried on by T before it joined the group – must have continued with development activity of the same description (although not necessarily on the same invention) for at least 12 months (in aggregate) after joining the group (and whilst still a member of the group).
A company does not have to meet the development condition in respect of all of its IP rights in order to be a qualifying company. However, only those rights for which it does meet the development condition will be qualifying IP rights.

There is also an “active ownership” requirement for companies that are members of a group. A company will satisfy the active ownership requirement if all, or almost all, of its qualifying IP rights are rights in respect of which either:

  • the development tests outlined in 1 or 2 above apply; or
  • the company performs a significant amount of management activity during the accounting period. In this context, management activity means formulating plans and making decisions in relation to the development or exploitation of the rights.

How do I work out how much profit to include?

The legislation has a seven step process that needs to be followed in order to identify the Relevant IP Profits (RIPP). The following diagram summarises the principal process for computing RIPP. The stages of the process  are then explained in the sections below. There is also an alternative methodology (“streaming” – see below) which replaces the first four chevrons in the diagram in certain situations.

What is my “gross Total Income”?

Total Income (TI) is the aggregate of:

  • amounts properly included as revenue in the company’s P&L account; and
  • amounts which are added to that in computing the profits of the trade for CT purposes; and
  • amounts (to the extent that they are not already included in the P&L) of damages, proceeds of insurance or other compensation brought into account as credits in computing the profits of the trade for that period; and
  • amounts (to the extent that they are not already included in the P&L) brought into account as receipts in computing the profits of the trade for that period as adjustments on a change in basis; and
  • amounts (to the extent that they are not already included in the P&L) which are brought into account as credits for that period on the disposal of intangible fixed assets; and
  • profits from the sale by the company of all or part of any patent rights held for the purposes of the trade which are taxed in the accounting period.
Certain credits broadly related to finance income are left out of TI. More detail is provided in HMRC’s Patent Box manual.

What is my “Relevant IP Income”?

RIPI will be the aggregate of amounts within TI that fall within the following heads:
  • Income embedded in patented products. Income from the sale of products incorporating at least one qualifying patent will be included in the Patent Box.
  • Income from patent licensing and royalties. As long as the patent is qualifying and the company satisfies the ownership and development criteria, royalties and licence fees arising from it will qualify.
  • Income from the sale of patents
  • Damages received for patent infringements
  • Other compensation
Patents used in a process
Companies sometimes use patents in industrial processes. It will not be possible to directly include income from products produced using such patented processes as it will not be RIPI as set out above. However, companies will be able to compute a notional royalty income from such patents, which will enable a proportion of the profits to be included in the Patent Box. Essentially, the notional royalty is the proportion of the income (which is not otherwise RIPI) arising directly from the use of the patent which the company would have to pay to a third party for use of the patented process (if it didn’t already have the right to use it).

What are my “adjusted trade profits”?

These are the normal profits of the trade adjusted by adding back any R&D relief superdeduction (just the amount of the uplift, not the original expenditure), adjusting for loan relationship or derivative contract debits/credits and excluding any interest income.

In the first four years after electing into the Patent Box regime, if the amount of R&D expenditure deducted in arriving at taxable profits is less than 75% of the average of the R&D expenditure for the four years prior to that time, then the profits are also adjusted by increasing the amount deducted to 75% of the average.

What is the “Routine Return”?

This computed by taking the company’s “routine deductions”, multiplying them by 10% and then multiplying by X% (see the second chevron in the diagram). “Routine deductions” are essentially the normal trading expenses of the company. More detail on these is provided in HMRC’s Patent Box Manual.

Note that debits arising from loan relationship and derivatives, R&D expenses, any R&D superdeduction, R&D or patent (capital) allowances and R&D related employee share acquisition costs are all excluded from “routine deductions”.

What is “small claims treatment”?

This is intended as a simplification for companies with small levels of QRP (see the fourth chevron in the diagram) to avoid the necessity of making the ‘marketing assets return’ adjustment.
A company is eligible to make a small claims election if either:
  • its total QRP for the period is not more than £1m; or
  • its total QRP for the period is not more than £3m and it has not deducted a marketing assets return in the previous 4 years.
Note that the £3m upper limit is shared amongst associated companies.
If 75% of an eligible company’s total QRP is less than £1m, then the company can elect for its RIPP to be equal to 75% of QRP. Otherwise, its RIPP will be capped at £1m.
Note that the £1m figure in this calculation is shared amongst associated companies.

What is a “marketing assets return”?

Essentially, this is a notional return earned by the company as a result of its marketing assets, rather than because of its qualifying IP. It is computed by assuming that the company has to pay a royalty (known as the NMR) to a third party for the use of any relevant marketing assets. That notional royalty payment is reduced by any actual marketing royalty paid (known as the AMR).
More detail on the NMR can be found in HMRC’s Patent Box Manual.
More detail on the AMR can also be found in HMRC’s Patent Box Manual.
If AMR > NMR, or the difference is < 10% of QRP, the marketing assets return is taken to be NIL.

What do you mean by “pre-grant profits”?

The patent application process can be quite long and in some cases profits may arise after the patent has been applied for, but prior to its actual grant. The legislation provides a mechanism for including such profits for up to 6 years prior to the grant of the patent. Following an election, these amounts are added to RIPP in the period in which the patent is granted.
Note that the company must have been within the patent box in the period in which the profits actually arose.

What is “streaming”, and when is it used?

Streaming is mandatory if any one of three conditions is met – see HMRC’s Patent Box manual for details of these conditions.
Even if streaming is not mandatory, the company may elect to use it to compute RIPP. Essentially, the company splits its total gross income into two streams – a RIPI stream and a non-RIPI stream – on a just and reasonable basis.
The company’s deductions from income necessary to get to taxable profit are then allocated to each stream on a just and reasonable basis. Similarly, a “routine return”, based upon the “routine deductions” allocated to the RIPI stream, is deducted from that stream to give the QRP (i.e. to the end of the fourth chevron in the diagram). The other adjustments outlined above are then made on a similar basis in order to arrive at RIPP.
Streaming may be worth considering if you have a significant amount of non-RIPI income that is less profitable than the RIPI income.

David O’Keeffe
Aiglon Consulting