Patent Box and R&D Tax Relief: How the two incentives can work together

Many business owners that are developing new products are likely to be familiar with either Research and Development (R&D) tax relief or the Patent Box regime. However, they are often viewed them as completely separate tax incentives when in reality, they can complement each other.

Innovation doesn't end once a project is completed.

Typically, businesses move through several stages - research and development, product testing and refinement, patent protection, commercial production and profitable sales.

That means different tax incentives can apply at different stages. R&D tax relief is designed to support the cost of innovation, while Patent Box rewards businesses once those innovations begin generating profits.

R&D tax relief: supporting development costs

Eligible companies may be able to claim relief for qualifying expenditure incurred while seeking scientific or technological advances.

Qualifying expenditure may include certain staff costs, consumables and software incurred on qualifying R&D activities, helping businesses reduce the cost of.

Patent Box: rewarding commercial success

Once innovation reaches the marketplace, Patent Box may reduce corporation tax on qualifying profits to an effective rate of 10%.

Rather than providing relief on expenditure, Patent Box applies to profits generated from patented inventions and qualifying intellectual property.

The combination means businesses can receive tax support both while developing technology and once that technology becomes commercially successful.

Why planning matters

The two regimes use different rules, calculations and qualifying criteria.

Businesses that consider both from an early stage may benefit from better record keeping, stronger documentation, more efficient allocation of development activities, earlier consideration of patent protection and improved long-term tax planning.

Waiting until profits arise may mean opportunities have already been missed.

Many companies assume Patent Box replaces R&D tax relief – but that simply isn’t true. Other misconceptions include things like only large multinational businesses qualify, patents are only worthwhile for tax reasons and the two claims cannot be made together.

In many cases, these assumptions are incorrect and the UK's innovation tax incentives are designed to support businesses throughout the lifecycle of creating new technology.

Review your innovation strategy

If your business invests in developing new technology, products or processes or is considering applying for patents it is worth reviewing how your innovation tax strategy fits together.

From development costs to commercial profits, the right tax strategy can support your innovation journey at every stage. Contact Monahans to find out how.

Charlotte Parker