Use Patent Box to reduce your company tax by 60%
Quiet Innovation
Innovation often happens quietly – through clever designs and smarter ways to build. But for one UK SME in the infrastructure sector, innovation isn’t just about technical design – it’s a powerful financial strategy. Thanks to the UK’s Patent Box tax relief, smart engineering has made a significant increase to their bottom line.
The UK’s Patent Box scheme offers an attractive opportunity for innovative businesses – yet many SMEs still overlook it. In this article, I’ll explore how the scheme works, why it remains underused, and how one company’s journey from confusion to clarity reveals its true potential: not only as a tool for tax efficiency, but as a driver of long-term business resilience
What is Patent Box?
The UK’s Patent Box regime allows companies to apply a reduced 10% Corporation Tax rate to profits earned from patented inventions. Introduced in 2013 and revised in 2016 to align with international standards, the scheme is designed to reward innovation and encourage companies to retain and commercialise intellectual property (IP) in the UK.
To qualify, a company must:
- Hold or exclusively license a qualifying patent granted by the UKIPO, EPO, or certain EEA countries.
- Have undertaken qualifying development relating to the patented invention.
- Generate income from the patent, through product sales, licensing, or use in services.
The relief applies to profits attributable to the patented element, and companies can backdate claims for up to five years once a patent is granted. While the rules are technical, the financial benefits can be substantial, especially for companies already investing in R&D.
Why many SMEs miss out
Despite its generous benefits, Patent Box remains underutilised, particularly by SMEs. We’ve explored the rationale for this before in Figure 1. The reasons are familiar: lack of awareness, perceived complexity, and confusion around eligibility.
One of our clients, an engineering firm that designs, manufactures, and installs steel infrastructure, had long been claiming R&D tax relief. But Patent Box? “I think it was pushed,” the company’s director admits. “I tend to get emails about tax relief relating to innovation.”
From R&D to Patent Box: a learning curve
Their first claim came in 2021. The process wasn’t easy, but it was worth it.
The company had already built a system for tracking R&D costs using job numbers. This allowed them to claim enhanced deductions on qualifying expenditure. But transitioning to Patent Box required a new layer of complexity: tracking profits from patented products, understanding the R&D nexus fraction, and navigating HMRC’s rules on eligible income.
“It was not easy to work out the relief due,” the director recalls. “There was conflicting advice on whether the sale of a component or the whole product applied. I had to do my own research.”
Their conclusion? If a patented component is integral to the product, the entire sale can qualify. That insight made a significant difference, especially for small, simple components that are embedded in high-value infrastructure projects.
For example, a patented bracket was included in most sales, and even though the component itself was relatively small, it was a fundamental requirement of the system and, therefore, integral. By applying the relief to the full product sale, the company was able to unlock far greater value.
Building a system that works
Over time, the company developed a robust internal system to flag eligible jobs at the point of sale. Once a patent is granted, they can backdate claims for up to five years, capturing profits from earlier periods when the product was already in use.
“Now, I think we have a system in place,” the director says. “It’s integrated with our job tracking and sales processes.”
Still, it wasn’t without challenges. Accountants were initially hesitant. Apportioning overheads and understanding adjustments, like the 10% routine costs deduction, required persistence and a willingness to dig into the detail.
“There’s always a grey area,” the director explains. “Apportioned costs and overheads are tricky. But once you understand the mechanics, it becomes manageable.”
The payoff? “When you’re making good profits, Patent Box can generate significant cash for investment. It’s essentially an extra 15% cash on all applicable sales.”
The strategic value of Patent Box
For this company, Patent Box isn’t just about tax savings, it’s about survival and growth. “Businesses usually fail through lack of cash, not profit,” the director notes. “Patent Box could be the difference between survival and failure.”
The scheme also reinforces a culture of innovation. The company runs an internal ‘ideas club’ to encourage creativity across all departments, from engineering to IT. “It maintains a focus on innovation, which is essential to maintain a competitive edge. It creates an upward spiral.”
Patent Box also complements R&D tax relief. While R&D relief supports innovation during development, Patent Box rewards commercial success. Together, they form a powerful incentive loop: invest in R&D, secure IP, and benefit from long-term tax efficiency.
Advice to other SMEs
The director is candid about the effort involved. “It’s hard work and I really don’t enjoy it. I’d rather be doing product development or mentoring. But it’s too good to ignore.”
Their advice to other SMEs? Don’t let the complexity deter you. Start by identifying patented products, track profits carefully, and seek expert support. The rewards, both financial and strategic, can be substantial.
“Even if the patent isn’t watertight in terms of design protection, it can still qualify,” the director adds. “So, obtaining patents is no longer just about safeguarding ideas and solutions, patents provide direct tax benefit, increasing the value of sales. It’s cumulative as clever ideas are sold at higher margins and higher margins, mean more tax relief.”
One final ancillary benefit: “Innovation is also the fun part of the job, which keeps staff motivated.” Well said!
Turning innovation into impact
The Patent Box regime offers a powerful incentive for UK companies to innovate and commercialise IP. While it may seem daunting at first, the experience of this engineering firm shows that with persistence and the right systems, SMEs can unlock significant value.
An accountant with a good knowledge of Patent Box is also invaluable and can make the journey easier.
For companies already investing in R&D, Patent Box is the next logical step. It’s not just about tax, it’s about building a resilient, innovation-driven business with the cash flow to grow.
In a world where margins are tight and competition is fierce; Patent Box can be the difference between standing still and moving forward. For this company, it’s become a cornerstone of their innovation strategy as it has significantly increased their bottom line, and a reminder that smart ideas deserve smart rewards.