How R&D Tax Relief and the Patent Box Can Save You Money

Innovation is the lifeblood of many businesses, particularly those in technology-driven industries. When it comes to claiming R&D tax relief and Patent Box incentives, companies often find themselves navigating complex processes to maximise tax savings and protect their intellectual property.

One of the most common areas of confusion is the intersection between R&D for tax purposes and the legal requirements for patenting an invention. While they may seem like two distinct processes, there are significant overlaps that can benefit companies engaged in cutting-edge innovation.

This post explores the relationship between the tax definition of R&D and the legal requirements for patenting. We’ll explore how combining R&D tax relief and Patent Box relief can help businesses save money and drive innovation.

Table of Contents

• Key Takeaways 

• The Tax Definition of R&D and Its Role in R&D Tax Relief

• The Rise of R&D Claims and the Dilution of the Definition 

• The Relationship Between R&D and Patenting 

• The Similarities Between the Tax Definition of R&D and Patentability 

• Patent Box Relief: A Strategic Advantage 

• How R&D Tax Relief and Patent Box Relief Work Together 

• Conclusion 

Key Takeaways

• R&D tax relief supports businesses engaged in advancing scientific or technological knowledge. It requires the project to go beyond the current state of knowledge in the field. 

• There is a strong connection between R&D tax relief and patenting. Patentability can strengthen an R&D tax relief claim by showing the innovation is both novel and technologically inventive.

• R&D tax relief and patenting requirements share common principles, such as the need to prove novelty and an inventive step. If a project is patentable, it likely qualifies for tax relief as well. 

• Patent Box relief provides a further tax incentive, reducing corporation tax on profits derived from patented innovations, which can significantly boost businesses involved in R&D. 

• Businesses should consider patenting their inventions not only to protect their intellectual property but also to enhance their eligibility for R&D tax relief and Patent Box benefits. 
  

The Tax Definition of R&Dand Its Role in R&D Tax Relief

The UK’s R&D tax relief schemes are designed to encourage companies to invest in research and development by offering them tax breaks. The fundamental requirement for claiming R&D tax relief is that the project must aim to achieve an advance in science or technology. This means that the project must seek to extend the boundaries of existing knowledge in the relevant field of science or technology. 

Under the tax rules, the advance must go beyond the current state of the art. It isn’t sufficient for a project to improve an existing product or process—it must push the scientific or technological boundaries of the field itself. For example, creating an innovative software solution that solves a specific business problem could qualify, but only if it represents an advance over existing technology rather than a simple upgrade.  

The core principle behind the tax relief is to support innovation. However, the definition of what constitutes "science" has broadened over time. The scope of eligible R&D activities now includes mathematical advances and certain aspects of software development.

Though the scope of “science” has expanded, projects must still demonstrate a clear advance in knowledge to qualify for relief.

With the recent changes to the UK’s R&D framework, it’s important to understand how the merged R&D tax relief scheme now operates.

The Rise of R&D Claims and the Dilution of the Definition

R&D tax relief claims have more than doubled from 45,000 in 2015/16 to over 90,000 by 2020/21. This surge has raised concerns, as many companies submit claims without proper scrutiny, prompting HMRC to question their validity.

The rise of R&D tax specialists charging high contingency fees has made the tax relief market more aggressive and competitive. More companies now apply for relief, but this has diluted the definition of what qualifies as eligible R&D activity. Many companies and advisors wrongly believe any technical problem-solving qualifies, even if it doesn’t meet HMRC’s strict eligibility criteria.

Confusion around R&D criteria has led to errors and fraud, affecting 16.7% of claims submitted in 2020/21, says HMRC. These errors cost the public purse £1.13 billion, prompting HMRC to increase scrutiny of all R&D tax relief claims. Companies now face stricter evidence requirements to prove their projects meet the necessary scientific or technological criteria.

The key takeaway: businesses must prove their R&D projects deliver a genuine scientific or technological advance, not just incremental improvements.

These concerns have prompted legislative updates read more about the R&D tax credit changes in 2024 and how they impact your business.

The Relationship Between R&D and Patenting

Although companies don’t need to patent their research to claim R&D tax relief, HMRC often raises the question during an enquiry. They frequently ask: “If the invention is so innovative, why didn’t you patent it?”

The reluctance to patent is often due to commercial reasons, such as the high costs associated with the patenting process or concerns that competitors might find ways to circumvent patent protections. Nonetheless, the lack of patenting does not automatically disqualify a company from claiming R&D tax relief. The real focus for HMRC is whether the project sought to achieve a scientific or technological advancement. 

The Similarities Between the Tax Definition of R&D and Patentability

Though R&D and patenting are distinct processes, the criteria for both share significant similarities. Both require companies to demonstrate that their work is novel, innovative, and contributes to a wider advancement in their field. 

1. Advancement in Science or Technology: 

2. The tax definition of R&D requires the project to result in an advance in knowledge. Similarly, for a patent to be granted, the invention must be new (novel), and it must also involve an inventive step, meaning it isn’t obvious to someone skilled in the field. 

3. Demonstrating Novelty: 

4. For R&D tax relief, businesses must demonstrate that the project pushes the boundaries of what is currently known. Likewise, to patent an invention, it must not be part of the existing body of knowledge—also referred to as the state of the art. 

5. Inventive Step: 

6. Both R&D tax relief and patents require an inventive step—meaning the outcome cannot be obvious to a skilled professional in the field. This is particularly important in showing that the project represents genuine innovation and not just a minor improvement. 
   

If a company gets advice that its invention is patentable, this can strengthen its R&D tax relief claim. A patent application provides tangible proof of innovation, helping demonstrate the project meets the criteria for R&D tax relief.

Companies struggling to prove R&D advancements can strengthen their case with a patentability opinion during an HMRC enquiry.

Patent Box Relief: A Strategic Advantage

For businesses that are already engaged in R&D and have patented their innovations, the UK offers a powerful tax incentive known as Patent Box Relief. This relief allows companies to pay a reduced corporation tax rate of 10% on profits derived from patented products or processes. 

Patent Box Relief is designed to encourage businesses to commercialise their patented inventions, offering them tax savings on income generated from patents. This can be particularly valuable for companies with a strong portfolio of patents or those that derive significant income from patented technologies. 

Companies claiming R&D tax relief and patenting innovations can benefit from both incentives. R&D relief offers upfront support during development, while Patent Box reduces tax on profits from commercialised inventions.

For a full breakdown of how this incentive works, see our guide to the UK Patent Box Regime.

How R&D Tax Relief and Patent Box Relief Work Together

The combination of R&D tax relief and Patent Box Relief can be an incredibly powerful tool for companies engaged in technological or scientific innovation. First, a business can claim R&D tax relief to reduce its tax liabilities for costs associated with the development of new products or processes. Then, once those innovations are patented, the company can benefit from the 10% corporation tax rate on any income generated from those patents. 

This dual approach not only boosts a company’s bottom line but also fosters a culture of innovation by making it financially viable to invest in R&D and protect intellectual property. 

If you're a small business starting your innovation journey, consider applying for R&D Advance Assurance to gain upfront clarity from HMRC.

Conclusion

Understanding the similarities between the tax definition of R&D and the legal requirements for patenting can help businesses take full advantage of the UK’s tax incentives for innovation. If a project is deemed patentable, it is often a strong indicator that it meets the criteria for R&D tax relief, making it easier to secure funding for further research and development. 

By considering both R&D tax relief and Patent Box Relief, businesses can optimise their tax position, reduce costs, and protect valuable intellectual property. If your company is developing new technologies or processes, it is well worth seeking advice from both an R&D tax specialist and a firm well-versed with the Patent Box procedure too, to ensure you are taking full advantage of all available incentives. 

Not sure how to work out your claim? Our step-by-step guide to R&D tax credit calculation breaks it down simply.

We’ve worked on several cases now, all with successful outcomes for our growing client base! 

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.

*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.