UK: The Patent Box Tax Regime - A Brief Insight Into Its Application

Last Updated: 16 May 2013
Article by Jennifer Pierce and Christopher Birch

The new "Patent Box" tax regime provides companies with the option of applying a reduced 10% corporation tax rate to the proportion of profits derived from the exploitation of patents granted by the UK Intellectual Property Office, the European Patent Office or certain other specified EEA countries ("Patents") (the regime also extends to other similar intellectual property rights but for the purpose of this article we will refer to Patents only).

Background information

The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions and certain other innovations. The relief is being phased in from 1 April 2013 and the lower rate of Corporation Tax to be applied will be 10 per cent.

Qualifying for the Patent Box regime

In order for a company (the "Company") to benefit from the Patent Box certain conditions must be met:

1. Patent ownership requirements The Company must be the owner or an exclusive licensee of the Patents

2. Development condition The Company, or subject to certain conditions another company in the Company's group, must have carried out "Qualifying Development" in respect of the Patents. (See box overleaf for a definition of Qualifying Development)

"Qualifying Development"

Qualifying Development" means either:

(i) creating, or significantly contributing to the creation of, the invention; or

(ii) performing a significant amount of activity for the purposes of developing the invention or any product or process incorporating the invention. Merely commercialising a fully developed product or process incorporating the invention will not be enough by itself.

3. Active Ownership condition In the event that the Company is part of a group of companies, the Company must meet the "Active Ownership" condition. The Active Ownership condition is met if either:

(i) the Company performs a significant amount of management activity in respect of the Patents, where "management activity" means formulating plans and making decisions in relation to the development or exploitation of the Patents; or

(ii) the Company has itself carried out Qualifying Development in respect of the Patents, rather than it having been carried out by another group company. The upshot of this condition is that if the Development Condition has only been met by virtue of a company within the Company's group having carried out the Qualifying Development, then in order for the Company to benefit from the regime it must be playing an active role in the management of the Patents.

Therefore, in certain circumstances an IP holding company within a group will be able to benefit from the regime.

Relevant IP income

The following categories of income are taken into account when calculating the profits which will benefit from the Patent Box regime:

1) Income from all sales of the patented item, or an item incorporating a patented item.

2) Licence fee and royalty income received under any agreement granting third parties: (a) a right in respect of the Patents; (b) any other right in respect of items or processes protected by the Patents; and/or (c) in the case an agreement granting rights alongside (a) or (b), any other right granted for the same purpose as those rights.

The income in the above two categories includes income from sales made, and licences granted, in territories outside of the protection of the Patents.

3) Income from the sale or disposal of the Patents.

4) Amounts received in respect of infringement, or alleged infringement, of the Patents - i.e. damages or settlement payments.

5) Other compensation paid in respect of items falling into category 1 or other lost relevant IP income. This, for example, would include damages from an overseas infringement claim in respect of items covered by the Patents.

Notional royalty

There is an additional way a company may benefit from the regime if it is using an invention which is covered by a Patent to generate income but such income does not fall within categories 1 or 2 above. For example, where a company uses a patented tool to produce the items it sells, or uses a patented process to provide a service to customers. In this event, the Company can claim the benefit of the regime in respect of an amount equivalent to the royalty the Company would expect to have pay if it needed a licence from a third party in order to exploit the Patent in such manner.

Example scenarios

Can the company in question benefit from the Patent Box in each of the scenarios overleaf and, if so, how?

Scenario 1

Company A is a member of a group of companies. Company A invents and subsequently patents a product, which it then markets.

1) Company A meets the Patent Ownership Requirements as it is the owner of the Patent covering the product.

2) Company A meets the Development Condition as, having created the invention, it will have carried out Qualifying Development in respect of the Patent.

3) As Company A is a member of a group of companies the Active Ownership Condition must be met but as Company A carried out the Qualifying Development itself this condition will be met automatically.

Company A will be able to benefit from the Patent Box in respect of income derived from the sales of the product as it will be Relevant IP Income (category 1).

Scenario 2

Company B invents and subsequently patents a process which it then uses to provide services to its customers.

As above, conditions for qualifying for the regime will be met but in this scenario the income received from customers in return for the service does not fall within the categories of Relevant IP Income. However, Company B will be able to benefit from the Patent Box regime by attributing a notional royalty in respect of the patented process.

Scenario 3

Company C invents and patents a product and then grants a non-exclusive licence to a third party permitting it to manufacture and sell the product.

As before, the conditions for qualification are met.

Company C will be able to benefit from the Patent Box in respect of income derived from the any licence fees and royalties received as they will be Relevant IP Income (category 2). Note that the licence that Company C grants does not need to be exclusive.

Scenario 4

Company D buys a Patent from a third party and then sells items incorporating the patented invention.

1) Company D meets the Patent Ownership Requirements as it is the owner of the Patent covering the product.

2) With respect to the Development Condition, Company D did not create the invention covered by the Patent. Therefore, in order to meet this condition Company D will need to have performed a significant amount of activity for the purpose of developing the product which incorporates the invention.

If Company D meets the Development Condition it can benefit from the Patent Box and income received from sales of the products will be Relevant IP Income (category 1).

Scenario 5

Company E buys a Patent covering a product from a third party and then grants a licence to another third party permitting it to manufacture and sell the product.

1) Company E meets the Patent Ownership Requirements as it is the owner of the Patent covering the product.

2) Company E does not meet the Development Condition so will not be able to benefit from the Patent Box (in respect of the royalties received under the Patent licence, or otherwise).

Scenario 6

Company F and Company G are members of a group of companies. Company F creates an invention. In accordance with the group's IP strategy, the rights to the invention are assigned to Company G which obtains a Patent in respect of it.

Company G then grants Company F an exclusive licence to exploit the Patent. Company F sell products covered by the Patent.

Company F:

1) Company F meets the Patent Ownership Requirements as it is an exclusive licensee under the Patent.

2) Company F meets the Development Condition as it created the invention.

3) Company F automatically meets the Active Ownership Condition as it created the invention itself.

Income received by Company F from product sales will be Relevant IP Income (category 1) hence Company F can benefit from the Patent Box.

Company G:

1) Company G meets the Patent Ownership requirements as it is the owner of the Patent.

2) Company G meets the Development Condition as, although it did not carry out Qualifying Development itself, Company F did whilst they were part of the same group.

3) As Company G did not create the invention itself, in order to meet the Active Ownership Condition it needs to be performing a significant amount of management activity in respect of the Patent (see above).

Provided that the Active Ownership Condition is met the royalty Company G receives from Company F under the licence with be Relevant IP Income (category 2) and Company G can benefit from the Patent Box. This is an example of how an IP holding company can benefit from the regime provided that it can satisfy the Active Ownership Condition.

Mixed sources of income

A further issue for companies when putting the regime into practice is what happens if there are mixed sources of income. For example, what if: (a) items which give rise to Relevant IP Income and items which do not are sold together as a single unit for a single price; or (b) income is derived under a single agreement which covers the sale of items or the grant of rights which would give rise to Relevant IP Income and others which do not?

With respect to items the first issue may be for the company to establish that the item covered by the Patent is 'incorporated' into the larger item which is being sold. HMRC's view is that incorporation means that the item is physically part of the larger item and is intended to be for its operating life (provided that it has not been incorporated merely to bring the regime into play). HMRC gives the example of a conservatory which contains a patented hinge as being a larger item which incorporates a patented item, and hence all income from the sale of that conservatory would be Relevant IP Income.

HMRC's example of a single unit which would contain items giving rise to Relevant IP Income and items which do not, is a home entertainment system where the TV is protected by Patents but the blu-ray player and surround sound system are not. In this case, the sale proceeds of the home entertainment system must be apportioned between Relevant IP Income and nonqualifying income on a 'just and reasonable basis'. The same type of apportionment would be required if the sales price for the conservatory mentioned above included installation.

It is this apportionment which may prove difficult for companies and where specialist accountancy input is likely to be required.

More information

For more information about the Patent Box regime see the HMRC's guide at claims/patent-box.htm

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Christopher Birch
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.