Can you claim R&D Tax Credits & Patent Box Relief?
Updated: Oct 17
You might have clients that are claiming R&D Tax Relief that has invested in patents or other equivalent Intellectual Property. If this is the case, they might also be eligible to claim Patent Box Tax Relief. Like R&D Tax Relief, Patent Box Relief is an incentive designed to drive UK companies to innovate, but with the specific intention of retaining Intellectual Property in the UK.
Read on to find out more about Patent Box Relief and how it interacts with R&D Tax Relief.
WHAT IS PATENT BOX TAX RELIEF?
Patent Box Tax Relief enables companies to access an effective corporation tax rate of 10% for profits from patents, or other eligible Intellectual Property.
A company may be able to make a Patent Box Relief claim if they own:
A qualifying patent or,
An exclusive licence to a qualifying patent.
If a business is doing one of the above activities, they may be able to make a Patent Box Tax Relief claim that could reduce their business corporation tax to 10%.
PATENT BOX ELIGIBILITY CRITERIA
To be eligible to claim, a business must:
be a UK Limited company paying UK corporation tax.
have developed an innovative product or process, filed a patent application, and made profits that are related to the patent.
have exclusive licence over a patented product.
When you hear patent, you might automatically think of groundbreaking inventions but it doesn’t have to be this complex. Patented inventions can be a result of a relatively small technical improvement to a product or process.
For clients that are put off by the prospect of a difficult, expensive process to apply for a patent, well the Patent Box Relief should provide the silver lining. For it’s not just UK profits that qualify for the relief. An amazing 100% of the company’s worldwide profits resulting from that patented product or process could qualify for a reduction to 10% corporation tax. From 1st April 2023 that’s up to a 15% saving!
Similar to R&D Tax Relief, Patent Box claims must be made before 2 years AFTER the end of the accounting year in which the relevant profits and income were made.
CAN YOU CLAIM R&D TAX CREDITS & PATENT BOX?
The short answer is yes. You might have thought that because the activity is all focused on innovation that there might be exemptions around being able to claim both. Wrong. The two schemes are completely separate but they can be combined, which is great news!
Companies can benefit from a 10% corporation tax for profits related to the patented product or process, whilst claiming up to £25 for every £100 spent on Research and Development. But the savings do interact with each other. R&D tax relief reduces the profits subject to corporation tax, whilst patent box applies a 10% tax rate on profits after applying R&D tax relief and the patent box calculations.
Let’s take a look at an example..
A cosmetic dentistry business made £800k profit for the accounting period ending 31st July 2021. They expect to pay £152k in corporation tax.
They own a patent for cosmetic dentistry which was granted for the UK in September 2020. They made £100k profit from the patent.
The business also undertook Research and Development (R&D) in respect of prototyping the product which cost them £100k in this accounting period.
Firstly, they can claim an additional £130k deduction from their profits due to the R&D activities which reduces their profits subject to tax down on £670k. This saves them £24,700.
Secondly, with a patent box election, the £100k patent profits are taxed at 10% instead of 19%. This saves them £9k.
By making these claims, it means the company will now pay £118,300 in tax, resulting in a total saving of £33,700.
When it comes to supporting clients through a dual claim of Patent Box Relief and R&D Tax Relief, it’s critical to calculate the benefits of doing both claims together, as well as separately. Claiming both reliefs might not always have the best outcome for the client, but we can assist clients with this tax advice.
RADISH TAX: YOUR R&D TAX RELIEF SERVICE
For DTX’ers with a potential R&D Tax Relief client you’d like to discuss please book a scoping call here.
Radish Tax by Diagnostax is a specialist R&D Tax Relief provider. Find out more about Radish Tax by Diagnostax.
Please note, as this blog was published prior to 1st April 2023, there is no reference to the changes which have been brought into place for the R&D tax relief schemes.
For expenditure on or after the 1st of April 2023, the following changes in rates of relief apply:
SME – the Enhanced Expenditure uplift rate has fallen from 130% to 86%; and the tax credit rate has fallen from 14.5% to 10% (exc. R&D intensive loss-making SMEs).
RDEC – the credit rate has increased from 13% to 20%.
Further, data and cloud computing costs can now be included within the claim qualifying expenditure calculation. Pure mathematics now falls within the scope of the relief.
For submissions on or after the 8th of August 2023, it is now required for an Additional Information Form to be submitted prior to submission of the R&D claim. For reference, please see our blog here.