Yes. The two reliefs sit in different parts of the corporation tax computation and neither shuts the other out. R&D tax relief works on what you spend on the research: the merged scheme credit is worth 14.7p to 16.2p per £1 of qualifying expenditure, and ERIS up to 26.97p. The Patent Box works on what you earn from the result, applying an effective 10% rate of corporation tax to profits attributable to qualifying patents. A company that develops a patented invention, claims R&D relief on the spend, then elects into the Patent Box on the profits, is doing what both regimes were written for: HMRC states the aim of the Patent Box as an additional incentive for UK companies to retain and commercialise existing patents and to develop new innovative patented products. Two things decide whether it is worth having — the election carries a deadline, and the profit that gets the 10% is scaled by how much of the underlying R&D you did yourself.
The two reliefs tax different things
R&D relief is expenditure-based. It attaches to qualifying costs in the period they are incurred, and does not care whether the work produced anything patentable, or anything at all.
The Patent Box is profit-based, and it needs a patent. To qualify a company must be liable to corporation tax, make a profit from exploiting patented inventions, own or hold an exclusive licence over the patents, and have undertaken qualifying development on them. A group company also has to actively own the invention, taking a significant role in managing its whole portfolio of eligible patents. The qualifying development test asks whether the company, or another group company, made a significant contribution to the creation or development of the patented invention, or of a product incorporating it.
That last condition is where the two regimes meet. The work behind an R&D claim is often the same work that satisfies the development condition years later — neither relief depends on the other, but the evidence overlaps. The timing does not: spending happens now, grant and commercialisation later.
The R&D fraction ties the 10% rate to your own R&D
HMRC puts it directly: the R&D fraction links the beneficial rate on income from a qualifying IP right to the research and development expenditure incurred by the company. It is calculated for each income sub-stream as (D + S1) × 1.3 ÷ (D + S1 + A + S2), capped at 1, where D is direct R&D expenditure, S1 is R&D subcontracted to unconnected parties, S2 is R&D subcontracted to connected parties, and A is the cost of acquiring the IP.
The design reads off the formula. Spend on your own R&D, or subcontract it to unconnected parties, and the fraction is 1 — the full relevant IP profit gets the reduced rate. Buy the patents in, or pay connected companies to do the research, and the fraction falls, though the 30% uplift on the numerator means roughly that proportion can go to acquisition or connected-party R&D before it is affected at all.
This applies to companies electing in after 30 June 2016: HMRC’s guidance is explicit that benefit is restricted where a company incurred expenditure acquiring the patents, or paid connected parties for their R&D.
The election, and how it is lost
The Patent Box is not automatic. A company elects in by giving notice in writing, and the latest time is the last day on which it could amend its tax return for the first accounting period the election applies to — twelve months after the filing date, which HMRC’s public guidance puts as within two years after the end of the accounting period in which the relevant profits and income arose.
There is no late election. HMRC’s position is that an election is made whenever it is made, and because it is an election rather than an annual claim there is no relief for lateness. Once made, it applies to all the company’s trades and every later accounting period until revoked.
Where the two computations touch
Three interactions matter before anyone models a number.
R&D expenses are not routine deductions. The calculation removes a routine return — 10% of certain deductions — before the reduced rate reaches anything, and R&D expenditure is excluded from those routine deductions, as are R&D allowances and patent allowances under Parts 6 and 8 of the Capital Allowances Act 2001.
The merged scheme credit does not inflate Patent Box income. HMRC’s calculation flowchart directs that the R&D expenditure credit, like finance income, is excluded from relevant IP income sub-streams.
Tracking is the real work. The R&D fraction has to be built from expenditure traced to the development of a particular qualifying IP right, a record easier to keep while the R&D claim is prepared than to reconstruct once the patent is granted.
Where to start
The two regimes are decided on different facts, and an election made without the patent position settled is worth less than one made with it. HMRC’s Patent Box guidance sets out the qualifying conditions, and a patent attorney is the right person on whether the rights themselves hold up.
The R&D side is where we work, and getting it right is what makes the expenditure record good enough to be used twice: which R&D scheme applies, then what your company needs to qualify. If the Patent Box question is live for you, talk it through with us.
Sources
- Corporation Tax: the Patent Box — the 10% rate; that companies must elect in; the election within two years after the end of the accounting period in which the relevant profits and income arose; the conditions of liability to corporation tax, ownership or exclusive licence, qualifying development and active ownership; and the restriction, for companies electing after 30 June 2016, where the company acquired the patents or paid connected parties for their R&D.
- CIRD200110: aim of the Patent Box — “The aim of the Patent Box is to provide an additional incentive for UK companies to retain and commercialise existing patents and to develop new innovative patented products.”
- CIRD201010: reduced CT rate for profits from patents — the 10% rate from 1 April 2013 on profits attributable to qualifying patents, delivered as an additional deduction in the corporation tax computation under Part 8A CTA 2010, with elections made under CTA10/s357A(1).
- CIRD210110: qualifying development — the claimant company or another group company must have made a significant contribution to the creation or development of the patented invention, or of a product incorporating it.
- CIRD274100: R&D fraction overview — “The R&D fraction links the beneficial rate on income from a qualifying IP right to the research and development expenditure incurred by the company”; the 30% uplift to the numerator; the cap at 1.
- CIRD275000: Patent Box calculation flowchart — the formula (D+S1)x1.3/(D+S1+A+S2) capped at 1, the meaning of D, S1, S2 and A, and step 17, requiring that RDEC and finance income are excluded from relevant IP income sub-streams.
- CIRD272000: tracking and tracing R&D expenditure — the requirement to identify R&D expenditure, trace it to the development of a particular qualifying IP right and monitor the link going forward, under CTA10/s357BLB.
- CIRD220450: deductions that are not routine deductions — under CTA10/s357BJB, R&D expenses (the amounts on which R&D relief is given plus the additional deduction) are not routine deductions, and “Research and development allowances and patent allowances under CAA01/ Part 6 and Part 8 are not routine deductions”.
- CIRD220100: relevant IP profits overview — the calculation stages: streaming income, removing the 10% routine return to give qualifying residual profit, removing the marketing assets return, then applying the R&D fraction.
- CIRD260100: how to make a Patent Box election — notice in writing under CTA10/S1119; the latest time being the last day the company could amend its return under FA98/SCH18/PARA15 for the first accounting period the election applies to; that there is no provision for a late election; and that an election applies to all trades and all subsequent accounting periods until revoked.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.