Combining R&D tax credits and Patent Box

At a time when businesses are contending with a maelstrom of macro-economic challenges, it would be only natural for innovation to take a back seat. But forward-looking businesses should be thinking beyond the current conditions by investing to make the next advances in their field.

That’s where innovation incentives come in. R&D tax relief claims and Patent Box Relief are key components of the innovation toolkit available to companies not just looking to ride out the storm but emerge as market leaders.

It’s a common misconception that businesses need to choose between Patent Box and R&D tax credits. This is not the case. In fact, R&D tax relief and Patent Box work in conjunction with each other, incentivising and rewarding different stages of the innovation life cycle.

What’s the difference between Patent Box and R&D tax credits?

Patent Box and R&D tax relief are both tax incentives available to UK businesses, but they differ in their focus and scope.

R&D tax credits are aimed at encouraging companies to undertake research and development activities by providing tax relief on eligible expenditure. This can result in a reduction of a company’s Corporation Tax bill or, in some cases, a cash payment. R&D tax relief can be claimed by companies of any size, regardless of whether they are making a profit or loss. There are currently separate schemes for SMEs and large companies, with differences in design and rates of relief. However, a merged R&D scheme will be introduced for accounting periods beginning on or after 1 April 2024. The new single scheme is closer to the Research and Development Expenditure Credit (RDEC), which is currently available for large companies.

On the other hand, Patent Box is a tax incentive that allows companies to apply a lower rate of Corporation Tax to profits earned from patented products or processes. The aim of Patent Box is to encourage innovation and investment by providing an additional incentive for companies to develop and commercialise new products.

Both incentives can be valuable tools for supporting business growth and innovation in the UK – and they can be used in combination. In fact, companies who have claimed R&D tax relief may already be in a strong position to claim under the Patent Box regime as they should already have processes in place to identify R&D projects. This is a necessary step to enable the streaming of income and expenditure to determine how profits map to relevant product sales, royalties and licence fees, patent sales, infringement income and notional royalties on processes or services.

FInd out more about the Patent Box regime, who can claim and how in our explained page.

Can I claim R&D tax relief and Patent Box relief?

The short answer is ‘yes’ – if you meet the respective eligibility criteria, there is no restriction on claiming both reliefs.

For instance, if a company has developed an innovative process or product for which they hold a patent, they may be able to claim both R&D tax relief and Patent Box relief. The company can claim R&D tax relief on the costs incurred during the research and development phase and may also be able to benefit under the Patent Box regime once the product or process is patented and profitable.

Of course, companies claiming R&D tax relief and Patent Box relief must ensure their claims are compliant with the relevant guidelines, which is where ForrestBrown can help. Through our work supporting thousands of UK business with R&D tax relief claims, we are well positioned to identify opportunities where patents are already in place or advise on innovations which may be worth exploring with patent lawyers.

Benefits of claiming both R&D tax relief and Patent Box relief

Claiming both R&D tax relief and Patent Box relief can provide a range of benefits:

• Increased cash flow: R&D tax relief can provide a cash boost by reducing a company’s Corporation Tax liability or providing a cash payment. Patent Box relief can also reduce a company’s Corporation Tax bill, providing additional financial savings.

• Encouraging innovation: By providing financial incentives for research and development and commercialisation of Intellectual Property (IP), companies are encouraged to invest in innovation and develop new products and processes.

• Competitive advantage: Patented products or processes can provide a competitive advantage by offering unique features or capabilities that differentiate a company’s offerings from those of its competitors.

• Higher profitability: The reduced Corporation Tax rate available under Patent Box can increase a company’s profitability, particularly if it earns significant profits from patented products or processes.

• Positive reputation: Claiming R&D tax relief and Patent Box relief can demonstrate a commitment to innovation and technological advancement, which can enhance a company’s reputation and attractiveness to investors.

• Employee engagement: In a global war for talent, attracting and retaining highly skilled staff to drive forward your R&D is a constant challenge. Claiming R&D tax relief and Patent Box enables you to demonstrate the value of their work and keep them engaged in the process.

Overall, claiming R&D tax relief and Patent Box relief together can provide significant financial and strategic benefits for eligible companies, helping them to grow, innovate and compete more effectively in their markets.

Find out how ForrestBrown helped Gardner Services claim Patent Box relief

A third-generation family business, Gardner Services Ltd produces challenging and complex components for sectors including aerospace, oil and gas, defence, automotive and construction. Using state-of-the-art machinery, Gardner delivers with accuracy and extremely tight tolerances, working with customers to meet their requirements from prototype to production.

How ForrestBrown can help combine R&D tax relief and Patent Box

Patent Box profits must be linked to R&D expenditure (using the nexus fraction) and the regime is designed to ensure companies benefiting from relief have proper substance in the UK. This ensures that Patent Box relief is only available to the extent that the company holding the IP has incurred expenditure itself or has subcontracted the expenditure to an unconnected third party.

This is where ForrestBrown’s experience as the UK’s leading R&D tax relief adviser comes to the fore. Our team are experienced in identifying and articulating R&D, meaning we are well placed to support your Patent Box relief claim too. We will ‘track and trace’ your profits back to R&D activities attributable to your patents. It is this profit that is eligible for the reduced 10% rate of Corporation Tax.