Patent pending? Start planning for Patent Box
If your company has developed an innovative product, process or technology and has a UK patent application pending, making a pre-grant election now can preserve up to six years of qualifying profits for a future Patent Box claim.
Act now, or lose years of qualifying profit
When your patent is granted, HMRC allows you to claim Patent Box relief on profits going back up to six years. But that window only opens if your company has made a pre-grant election during the pending period and kept the right records throughout. Companies that wait until grant to think about Patent Box routinely lose years of relief they could have claimed. The time to act is while your application is still pending.
Up to six years of profits can be claimed, but only if you make the pre-grant election
When a patent is granted, HMRC allows qualifying profits from the pre-grant period to be brought into the Patent Box calculation, going back up to six years from the date of grant. Accessing that window requires a specific step: a pre-grant election made while the patent application is still pending.
The pre-grant election must be made during the pending period
To unlock the six-year carry-back of pre-grant profits, your company must make a formal pre-grant election before the patent is granted. This election is separate from the standard Patent Box election made on grant. Without it, the six-year window is not available, regardless of how much qualifying profit arose during the pending period.
The pre-grant election and the standard Patent Box election on grant are two distinct steps. Both must be made, and the pre-grant election cannot be made retrospectively once the patent has been granted.
If your patent is pending now, the pre-grant election must be made before grant. Once granted, that opportunity is gone.
Arrange a Free ConsultationYour patent is pending. What should you do now?
The period between filing your patent application and receiving the grant is when the pre-grant election must be made. This is not something that can be done after the patent is granted.
By making the pre-grant election and identifying qualifying income and expenditure from the outset, you preserve the right to bring pre-grant profits into the Patent Box calculation on grant, and build the records needed to support that claim.
Once the patent is granted, qualifying profits arising during the relevant pre-grant period may be capable of being brought into the Patent Box calculation, going back up to six years, but only where the pre-grant election has been made.
Don't wait until the patent is granted
Patent Box calculations can involve more than simply identifying sales of a patented product. The rules can require detailed analysis of:
- Revenue generated from the relevant intellectual property
- Costs associated with generating that revenue
- Research and development expenditure
- Acquired intellectual property
- Qualifying development activities
- The company's ownership or licensing arrangements
- The Patent Box R&D nexus calculation
Keeping appropriate records while your patent is pending can make the eventual claim significantly easier to establish and substantiate.
Electing into the Patent Box regime
Patent Box relief is not automatic. A company must make a formal election to be taxed under the Patent Box regime. Without that election, no relief is available, regardless of how much qualifying IP income the company generates. For companies with a patent pending, there is an additional and separate step: a pre-grant election that must be made before the patent is granted. This is the mechanism that unlocks the six-year carry-back of pre-grant profits, and it cannot be made retrospectively.
The standard Patent Box election
A Patent Box election is made in the company's Corporation Tax return for the accounting period in which the company wishes to enter the regime. It cannot be made retrospectively for earlier periods, and must be made within two years of the end of the relevant accounting period.
The pre-grant election — a separate requirement
For companies with a patent pending, a pre-grant election must also be made before the patent is granted. This is a distinct step from the standard Patent Box election. It is the pre-grant election that allows qualifying profits from the pending period to be brought into the Patent Box calculation on grant, going back up to six years. Without it, those pre-grant profits are permanently excluded.
The election applies going forward
Once the standard Patent Box election is made, it applies to all qualifying IP profits from that period onwards. Companies can also elect out of the regime, but an exit carries a five-year exclusion period before re-entry is permitted.
Why the pre-grant election cannot wait
Once a patent is granted, the opportunity to make a pre-grant election is gone. There is no mechanism to make it retrospectively. Companies that engage with Patent Box planning only after grant will find the six-year window closed to them, even if they had years of qualifying profits during the pending period. This is the single most common and most costly mistake we see.
We advise clients on the timing and mechanics of the election as part of every Patent Box engagement. Getting this right from the outset avoids the most common and most costly mistakes.
When should you elect in? It depends on your IP profit position.
The Patent Box reduces the effective rate of Corporation Tax on qualifying profits to 10%. But that benefit only arises when the IP activity is profitable. The timing of the election requires careful consideration of your current and projected IP profit position.
IP is currently profitable
If your qualifying IP income already exceeds the costs attributable to it, electing in as early as possible will generally be beneficial. The reduced 10% rate applies from the first period of election, and delaying costs you relief on profits that are already arising.
IP is currently loss-making
If your IP activity is generating losses, electing in early can be actively harmful. Patent Box losses are ring-fenced within the regime and can only be offset against future Patent Box profits. They cannot be surrendered as group relief or offset against non-Patent Box profits in the normal way. Electing in while loss-making can therefore trap losses and reduce their value. In this position, it is often better to delay the election until the IP activity moves into profit.
Mixed position across the group
Where a group has multiple companies with qualifying IP, some profitable and some loss-making, the election decision needs to be considered company by company. Electing in for a loss-making entity while another is profitable does not allow the losses to be shared. Each company's Patent Box position is calculated separately.
Transitioning from loss to profit
Companies that are currently loss-making but expect to move into profit as the technology matures need to plan the election timing carefully. The two-year window gives some flexibility, but the election must still be made within that period for each accounting year you wish to include. We model the expected profit trajectory and advise on the optimal election date.
There is no single right answer on election timing. The correct approach depends on your current IP profit position, your group structure, your projected trajectory, and the interaction with other reliefs. This is one of the areas where specialist advice makes a material difference.
From patent pending to Patent Box claim
We work alongside companies at every stage of the patent lifecycle. Here is what engaging us during the pending period typically looks like.
Initial assessment
We review your patent application, your company's IP ownership structure, and your current revenue streams to assess the likely scope of a future Patent Box claim. We identify which income streams are likely to qualify, consider whether the ownership and development conditions can be met, and give you a clear picture of the opportunity before committing to a full engagement.
Planning and record-keeping framework
We identify the income streams, costs, and R&D expenditure that will need to be tracked, and put in place a practical framework for capturing that information as your business operates. This means defining what qualifies, how it should be recorded, and who in your business needs to be involved. It avoids the need to reconstruct records retrospectively, which is both time-consuming and, in some cases, not possible.
IP ownership and structure review
Patent Box relief requires the claimant company to own the patent or hold an exclusive licence. If your IP is currently held in a holding company or overseas entity, we review the structure and advise on whether a transfer or reorganisation is appropriate before grant. Getting this right before the patent is granted is significantly simpler and less costly than trying to correct it afterwards.
Claim preparation on grant
When your patent is granted, we are already familiar with your business and your IP. We prepare the standard Patent Box election and calculation, liaise with HMRC where required, and ensure the claim is submitted correctly and on time. Because the pre-grant election was made during the pending period and the groundwork has been done, we can move quickly and ensure you capture the full benefit from the earliest possible date, including any qualifying pre-grant profits within the six-year window.
The difference planning ahead can make
Consider a UK technology company that files a patent application in Year 1. The patented process is already embedded in a software product generating significant licence revenue. The patent is granted in Year 3.
- No records maintained during Years 1 and 2 to identify qualifying IP income or apportion costs
- IP held in a holding company with the ownership condition not met without restructuring
- Patent Box election made in Year 3 only, with limited ability to recover pre-grant profits
- Nexus fraction reduced because R&D expenditure was not properly documented
- Qualifying income streams identified and tracked from Year 1
- IP ownership transferred to the trading company before grant, satisfying the ownership condition
- Pre-grant profits brought into the Patent Box calculation on grant, within the six-year window
- Full R&D expenditure documented, supporting a stronger nexus fraction and a larger qualifying profit
This is an illustrative example only. Actual Patent Box benefits depend on individual circumstances, qualifying conditions, and the applicable rules.
Patent pending today. Make the pre-grant election before it is too late.
The pre-grant election cannot be made once your patent is granted. Contact us now to discuss your patent application and ensure the right steps are taken while there is still time.