Can you claim R&D tax relief and the Patent Box together?

Yes, a company can claim R&D tax relief and use the Patent Box, because the two reliefs apply at different stages of the same invention. R&D relief rewards the cost of developing it. The Patent Box then taxes the profit it earns at 10% instead of the main Corporation Tax rate, provided the invention is protected by a granted patent or similar right. The link between them is the R&D fraction, which scales the Patent Box benefit to the R&D your company or group really carried out.

How the two reliefs differ

R&D relief looks backwards at spending. You claim it on qualifying costs in each accounting period, whether or not the project ever makes money. The test is whether the work sought an advance in science or technology by resolving uncertainty. Our page on what qualifies explains it, and the merged scheme covers how the relief is worked out.

The Patent Box looks forwards at profit. A company that elects pays Corporation Tax at the special 10% rate on its relevant IP profits, under section 357A of the Corporation Tax Act 2010 (opens in a new tab). HMRC describes it in its Patent Box guidance (opens in a new tab). It needs a granted qualifying right, such as a UK or European patent, and a company that meets the development condition, and for groups the active ownership condition. Our Patent Box page sets out those conditions.

So an early-stage company with no profits can have R&D relief and no use for the Patent Box. A mature company with a patented product can have both.

Do you have to choose?

No. HMRC's Patent Box guidance does not make R&D relief a bar to electing, and the conditions in Part 8A of the Corporation Tax Act 2010 are separate from the R&D relief rules. HMRC's manual on the R&D fraction goes further. It says it is not necessary for the R&D expenditure to have been included in an R&D tax credit or RDEC claim for it to count in the Patent Box calculation.

What matters is that the facts are consistent. The same project records support both, and the R&D spend used in the Patent Box fraction should tell the same story as your R&D claim.

How R&D spend affects the Patent Box: the R&D fraction

The OECD calls this the nexus approach. In UK law it is the R&D fraction in section 357BLA (opens in a new tab). HMRC's manual at CIRD274200 gives the formula as the lower of 1 and:

(D + S1) x 1.3 divided by (D + S1 + S2 + A)

• D is direct expenditure on relevant R&D, carried out by the company itself.
• S1 is qualifying expenditure on relevant R&D subcontracted to unconnected persons.
• S2 is qualifying expenditure on relevant R&D subcontracted to connected persons.
• A is qualifying expenditure on acquiring the qualifying IP right or an exclusive licence.

"Relevant R&D" means R&D within the meaning of section 1138 of the Corporation Tax Act 2010 that relates to the qualifying IP right. It is a separate definition from the R&D relief cost categories, so the figures need mapping to both.

The 1.3 uplift allows up to about 30% of the R&D to sit with connected parties, or to be spent on acquisitions, without reducing the fraction. HMRC's guidance says the fraction is 1 where there are no acquisition costs and all the R&D is done in-house or by third-party subcontractors. The result is capped at 1.

The fraction is calculated for each sub-stream of IP income and multiplied by that sub-stream's relevant IP profit.

A worked example

This is an illustration with invented figures, not a client case. It assumes the main Corporation Tax rate of 25% and that, after streaming and the routine return and marketing assets steps, the profit from the patented product before the R&D fraction is £200,000.

Version A: development done in the group's own company.

• In-house R&D (D): £400,000
• Unconnected subcontractors (S1): £100,000
• Connected subcontractors (S2): £100,000
• Acquired IP (A): nil

The fraction is (£500,000 x 1.3) divided by £600,000, which is 1.083. It is capped at 1, so the full £200,000 counts as relevant IP profits. HMRC's method gives a deduction of relevant IP profits x (25% minus 10%) divided by 25%, which is £120,000. At 25%, that saves £30,000 of Corporation Tax.

Version B: more of the work done by a connected company.

• In-house R&D (D): £400,000
• Unconnected subcontractors (S1): £100,000
• Connected subcontractors (S2): £300,000
• Acquired IP (A): nil

The fraction is £650,000 divided by £800,000, which is 0.8125. Relevant IP profits are £162,500, the deduction is £97,500, and the saving is £24,375.

The product, profit and patent are identical. Moving £200,000 of development to a connected company cost £5,625 of tax saving in this example. In a real case, the routine return, marketing assets return and streaming also change the figures, so treat this as a guide to the direction, not a forecast.

Practical points

• Keep project records by patent. The fraction needs R&D linked to each qualifying right, so project records should say which invention each activity served.
• Watch connected-party arrangements. Groups that centralise development in one company and hold the patents in another should model the fraction before restructuring.
• Elect on time. The election must be made within two years after the end of the accounting period in which the profits arose.
• Use streaming. Companies electing now should expect to separate relevant IP income from other income.

We specialise in R&D tax relief. On the Patent Box we check how it interacts with your R&D claim and make sure the figures agree, and where a full Patent Box computation is needed we point you in the right direction. To see what the R&D side could be worth, use the R&D benefit calculator.

Talk to us

If you have a patented product and an R&D claim, or expect to have both, book a call. We will look at how the two fit together. We reply the same working day.

This article is general information, not advice. The Patent Box has detailed rules, and its effect depends on your circumstances.