What is the patent box regime?
Answered 11 March 2026
Here is a comprehensive explanation of the Patent Box regime, drawing on both the legislation and HMRC guidance.
The Patent Box Regime
What the law says
The Patent Box is contained in Part 8A of the Corporation Tax Act 2010 (CTA 2010), introduced by the Finance Act 2012. Its core mechanism is as follows:
Election and reduced rate A company may elect that any relevant IP profits of a trade for an accounting period are chargeable at a lower rate of corporation tax. The election is given effect by allowing an additional deduction in calculating the profits of the trade. The special IP rate of corporation tax is 10%.
Qualifying company conditions A company is a qualifying company for an accounting period if:
- It holds any qualifying IP rights, or holds an exclusive licence in respect of qualifying IP rights (Condition A); or
- It has previously held such rights and is receiving income from them in the period (Condition B); and
- If it is a member of a group, it meets the active ownership condition (Condition C).
A right is a qualifying IP right only if: (a) it is a right to which Part 8A applies, and (b) the company meets the development condition in relation to the right.
Development condition A company meets the development condition if it (or a fellow group member) has carried out qualifying development in relation to the right.
Active ownership condition (for group companies) A company meets the active ownership condition if all or almost all of its qualifying IP rights are rights in respect of which it either: (a) performs a significant amount of management activity (formulating plans and making decisions in relation to development or exploitation), or (b) meets the development condition directly.
HMRC guidance / practice
Overview and history Finance Act 2012 introduced Part 8A to CTA 2010, allowing companies to elect to apply a 10% rate of corporation tax to all profits attributable to qualifying patents and certain other IP rights, from 1 April 2013. The full benefit was phased in over the first four financial years, with the full reduced rate applying from 1 April 2017.
Following the G20-OECD BEPS project conclusions in October 2015, the regime was reformed to require sufficient economic substance by linking benefits to the level of R&D expenditure incurred to develop the IP (the "nexus" approach). These changes, largely contained in s.64 of the Finance Act 2016, commenced from 1 July 2016.
How the deduction works The reduced rate is delivered through an additional deduction in the corporation tax computation. The Patent Box deduction formula is:
RP × (AR – IPR) / AR
where RP = Relevant IP Profits, AR = Applicable Rate (main rate or small profits rate), and IPR = 10%.
Four-stage calculation of Relevant IP Profits There are four stages to calculate relevant IP profits:
- Identify profits attributable to income from exploiting patented inventions (relevant IP income).
- Remove a routine return (the profit a business would earn even without patented technology).
- Remove profit associated with other intangible assets such as brand or marketing assets.
- Apply the R&D fraction (the nexus step, now required for all companies).
Relevant IP losses If the calculation produces a negative figure (a relevant IP loss), the company cannot benefit from the regime in that period. A relevant IP loss reduces the relevant IP profits of other group members and any balance is carried forward to reduce future relevant IP profits in the same company.
Interaction with interest restriction rules The Patent Box deduction is an excluded amount for tax-EBITDA purposes under TIOPA10/S407(3)(l), meaning it should not be brought into account when calculating a company's tax-EBITDA. This prevents the Patent Box deduction from distorting core earnings and reducing the benefit of the regime for companies subject to an interest restriction.
Citation sources
PART 8A Profits arising from the exploitation of patents etc CHAPTER 1 Reduced corporation tax rate for profits from patents etc Election for special treatment of profits from patents etc 357A 1 A company may elect that any relevant IP profits of a trade of the company for an accounting period for which it is a qualifying company are chargeable at a lower rate of corporation tax. 2 An election under subsection (1) is to be given effect by allowing a deduction to be made in calculating for corpor
PART 8A Profits arising from the exploitation of patents etc CHAPTER 2 Qualifying companies The development condition 357BC 1 A company meets the development condition in relation to a right if condition A, B, C or D is met. Section 357BD (meaning of “qualifying development”) applies for the purposes of this section. 2 Condition A is that— a the company has at any time carried out qualifying development in relation to the right, and b the company has not ceased to be, or become, a controlled mem
The Patent Box Regime is one of the qualifying tax reliefs specified as an as an excluded amount in TIOPA10/S407(3)(l). If brought into account for tax-EBITDA purposes, the additional Patent Box deduction would have the effect of distorting the core earnings of the company. Effectively, for a company which is subject to an interest restriction, this could reduce the benefit of the Patent Box regime by 30% (or higher if using the Group Ratio Method). Consequently, an additional deduction received
The Finance Act 2012 introduced a new Part 8A in the Corporate Tax Act 2010 (‘CTA10’). Commonly known as the Patent Box, this new regime allows companies to elect to apply a 10 per cent rate of corporation tax from 1 April 2013 to all profits attributable to qualifying patents and certain other intellectual property rights. The full benefit of the regime was phased in over the first four financial years with the full reduced rate applying from 1 April 2017 (CIRD260170). A company that is a quali
Particularly in the early stages of IP development a company may derive income from its qualifying IP rights but not yet return a profit. Or it may produce a profit but this is less than a routine return on the costs of earning the income. In this case the calculation of relevant IP profits (‘RP’) will result in a negative figure, referred to in the legislation as a relevant IP loss (CTA10/S357C(3)). One consequence is that the company will not be able to benefit from the regime for that period
From 1 April 2013 companies may elect into the Patent Box regime. The Patent Box allows qualifying companies (CIRD210000) to be taxed at a reduced rate on the profits from exploiting patents and other specified intellectual property. Their other profits are taxed at their applicable rate of corporation tax. The calculation to blend the Patent Box reduced rate and the applicable rate of corporation tax requires an additional deduction (‘the Patent Box deduction’) from the profits of the trade for
Finance Act 2012 introduced a new part 8A to CTA10 (profits arising from the exploitation of patents etc) following three rounds of consultation: November 2010 - The Taxation of Innovation and Intellectual Property June 2011 - Consultation on the Patent Box December 2011 - Draft legislation and explanatory notes, Patent Box, response to consultation, and The Patent Box: Technical Note and Guide to the Draft Legislation The Patent Box: Technical Note and Guide to the Finance Bill 2012 clauses was