What Is Patent Box Qualifying Income?

The UK Patent Box regime offers a reduced 10% Corporation Tax rate on profits earned from patented inventions. But not all income qualifies. To benefit from the relief, companies must identify and isolate “qualifying income” linked to their patented intellectual property (IP). This article explains what counts as qualifying income and how to calculate it.

What Counts as Qualifying Income for Patent Box?

Qualifying income—also known as “relevant IP income”—includes revenue streams that are directly attributable to the exploitation of patented inventions. According to HMRC guidance, this includes:

• Sales of patented products: Income from selling products that incorporate a patented invention.

• Sales of products made using a patented process: Even if the product itself isn’t patented, using a patented method in its manufacture can qualify.

• Licence fees and royalties: Income from licensing out patented technology.

• Patent infringement compensation: Damages or settlements received from enforcing patent rights.

• Sales of patents: Proceeds from selling qualifying IP rights.

What Doesn’t Qualify for Patent Box?

Income that is not directly linked to the patented invention or its use typically does not qualify. For example:

• Sales of non-patented products or services

• Income from trademarks or brand value

• Routine profits unrelated to the patented innovation

Streaming vs. Pro-Rata Allocation

Companies must isolate qualifying income from non-qualifying income. This can be done using:

• Pro-rata allocation: Applying a percentage based on the proportion of qualifying products or services.

• Streaming: Separating income and expenses into distinct streams for patented and non-patented activities 2.

Streaming is often preferred for accuracy, especially when only part of a company’s operations involve patented technology.

The Role of the R&D (Nexus) Fraction

Even if income qualifies, the amount eligible for the 10% tax rate is limited by the “nexus fraction.” This fraction reflects the proportion of R&D activity undertaken by the company itself (as opposed to outsourced or acquired IP). The formula includes:

• Qualifying in-house R&D expenditure

• Acquisition and subcontracted R&D costs

• A 30% uplift cap on outsourced R&D

The nexus fraction ensures that only profits linked to genuine UK-based innovation benefit from the relief.

Practical Examples

• A company sells a patented medical device. Revenue from those sales qualifies.

• Another company licenses its patented software to third parties. The licence fees qualify.

• A manufacturer uses a patented process to produce packaging. The income from those products may qualify, even if the packaging itself isn’t patented.

Final Thoughts

Identifying qualifying income is a critical step in claiming Patent Box relief. It requires a detailed understanding of how your company’s IP is used to generate revenue. Proper documentation, clear income streams, and accurate R&D tracking are essential.

If you’re unsure whether your income qualifies, it’s worth seeking specialist advice to ensure your claim is robust and compliant.

For more detailed information and assistance with Patent Box tax relief, please contact me at will@rainfordir.co.uk or book a call using the link below.