Further to its initial announcement last November, on 10 June the Coalition Government published a consultation paper on its proposal to charge corporation tax at a reduced rate of only 10% on company profits derived from qualifying patents and analogous intellectual property (the Patent Box).

This client advisory is the third in a series of four articles summarising aspects of the proposed Patent Box regime, and describes the sources of income that will qualify for the favourable tax treatment.

The first advisory, which provides an overview of the key features of the regime, can be accessed [here]. The second advisory, which describes the rights that will qualify for the reduced tax rate, can be accessed [here].


The consultation paper proposes that "qualifying income" will be determined by reference to products, rather than individual patents, as this will be easier to access from accounting records. As global income from qualifying patents is eligible for the Patent Box, this should also make extraction from accounting records more straightforward.

Sources of qualifying income

All royalties and licence fees received from inventions that are protected by a qualifying patent or other qualifying IP will be qualifying income, whether used in an industrial process or incorporated into products. Damages for breach of a qualifying patent will also be eligible to the extent that they compensate the rights holder for income that would otherwise have qualified. Income from the sale of patents will also be included in the Patent Box.

"Qualifying income" will be given a wide interpretation, to cover all income derived from products and bundles of intangible assets, as long as they include at least one invention covered by a qualifying patent. However, in order to ensure compliance with the principles of the Patent Box, the patented invention must be an integral part of the product or bundle of assets, and not just added to bring the item into the Patent Box. Consequently, there must be a single composite product with a degree of functional interdependency. Income from the sale of bona fide spare parts for patented products will also be covered.

Income derived from inventions that are the subject of patent applications can qualify if a patent is subsequently granted. If so, income derived from the date of the application or, if less, the four years before the grant, will be qualifying income and for ease of administration will fall to be assessed in the accounting period in which the grant is made (not the earlier periods in which the income is received).

Income subject to "divisionalisation" rules

A distinction is made between products that incorporate patented inventions and the industrial processes by which products are made. In many cases products are made by processes that incorporate patented inventions. Sales of such products will not qualify for Patent Box treatment if they do not themselves contain a patented invention. Where the process contains qualifying patents, but the products do not, divisionalisation rules will apply to such patented processes. These will allow companies to impute an arms-length royalty for the use of process patents, which will be deemed to be qualifying income. In addition, income from a license of the patented process and sales of equipment that incorporates the patented process will be qualifying income.

The divisionalisation rules may also apply to service income in limited circumstances. Generally, service income will not qualify. Where services and patented products are "bundled" for sale, the income will have to be apportioned between them and only the income attributable to the patented products will be qualifying income. However, if it can be shown that the service provider would pay a royalty for the use of a patented invention, divisionalisation rules may apply.

Non-qualifying income

Financial income and North Sea Ring fence income will not be capable of being qualifying income.