R&D tax credits and Patent Box: how to combine them

Combining R&D tax relief and Patent Box

Combining the two usually makes sense when you have (or expect to have) a patented product or process that will generate meaningful profit, and you are still investing in R&D to improve it or develop next-generation versions. In that situation, R&D relief supports your current spend, while Patent Box can reduce the tax you pay on the profit linked to the patented innovation once it is granted and commercialised.

It often does not make sense (yet) if you are pre-revenue or consistently loss-making, because Patent Box reduces tax on profits and profits may be limited in the near term. It can also be poor value if you have not protected the right IP, if the patented element is minor compared with the overall product value, or if your structure makes it hard to show who owns the IP and who earns the income. In those cases, the time is better spent getting your IP, contracts and product cost mapping into shape first.

Under the current UK rules, most companies claim R&D relief under the merged R&D relief scheme for accounting periods beginning on or after 1 April 2024 (with additional support available for certain loss-making, R&D intensive SMEs). This makes planning even more important because the relief is delivered as a taxable expenditure credit and the cash impact depends on your tax position and payroll profile.

The data you need to collect for your R&D and Patent Box claims

The biggest practical mistake is treating Patent Box as something you “do at the end”. Both Patent Box and R&D relief reward businesses that can clearly explain what the work is, what it cost and what income it connects to.

For R&D relief, you need a clear definition of the R&D project and the scientific or technological uncertainties being addressed. Your narrative should explain what you were trying to achieve, why it was not straightforward, and how your team tried to resolve the uncertainty.

For Patent Box, you need three simple datasets that tie together: (1) your qualifying IP rights, (2) the income linked to them, and (3) the costs and R&D spend that support the Patent Box calculation. If you build these as you go, the year-of-grant Patent Box claim becomes a tidy computation rather than a reconstruction exercise.

A practical “minimum viable” dataset to start building now

IP register (simple is fine): patent numbers, jurisdictions, application date, grant date, ownership entity, exclusive licence details (if relevant), and which products or services the right relates to. The point is not perfection. The point is having a single place where the business can see what is protected and who owns it.

Product and revenue mapping: which Stock Keeping Units (SKUs), product families, licences, or royalty streams are linked to which patents. Patent Box is based on profits from exploiting qualifying IP, so you need to know where the relevant income sits in your systems and how you will identify it year to year.

Cost and margin mapping: a sensible way to attribute direct and shared costs to the patented product line. If you cannot explain costs, you cannot explain profit, and Patent Box relief is calculated on qualifying profits, not revenue.

Practical workflow for internal teams: who does what

This works best when each team owns a clear part of the job and the handovers are simple.

Finance owns the numbers and the “shape” of the claim

Finance should own the chart of accounts mapping for qualifying spend for R&D tax credits, the payroll awareness needed for the PAYE cap, and the end-to-end tax computation process. Under the merged scheme, the expenditure credit is calculated by applying the scheme rate to qualifying expenditure and the credit is taxable as it is treated as trading income. That means finance needs to model the net impact properly, not just the headline credit.

Technical leads own the R&D story

Your engineering, science, software or product leads should define the projects and uncertainties in plain English. This narrative is what makes the costs make sense and it also helps connect the innovation to the patented invention later. A strong technical story reduces friction in both R&D claims and Patent Box computations, because it explains why the spend happened and what it produced.

IP counsel or patent attorneys own what is protected and what is enforceable

Patent Box eligibility depends on owning or holding an exclusive licence to qualifying rights, and those rights need to be clear. IP counsel should confirm what the patents actually cover, which products incorporate the patented invention, and whether licence terms are genuinely exclusive where that route is being used. This is also where you avoid the headache of a product launch outpacing the IP paperwork.

Evidence and governance: what “HMRC-ready” looks like

“HMRC-ready” does not mean you need a perfect system. It means your claim is explainable, consistent and supported by records that match how the business actually operates.

For R&D tax relief claims, it also means meeting current process requirements. Many new R&D tax relief claims require a claim notification or an Additional Information Form (AIF), and there are formal information requirements that push businesses towards clearer project descriptions and cost breakdowns. If you standardise what you capture each year, your compliance effort becomes repeatable and much less painful.

For Patent Box, good governance is all about “tracking and tracing”, which is the link between R&D expenditure, the qualifying IP rights, and the IP income derived from those assets. In practice, you want to be able to show how R&D spend relates to the patented development and how the business earns income from it.

A good evidence pack usually includes

• A short R&D technical summary per project, focusing on the uncertainty and the advance sought
• A cost breakdown that ties to payroll, invoices and ledgers, plus the method used for apportionments
• A Patent Box IP schedule and a clear mapping from patents to products, licences, and income streams, plus supporting contracts for licences and royalties where relevant
• Working papers for streaming and the R&D fraction, including the assumptions used and why they are reasonable

Common pitfalls to avoid for Patent Box claims

Streaming: mixing patented and non-patented profit

Patent Box only applies to the qualifying slice of profit. If patented and non-patented products share the same cost base, it is easy to overstate the profit linked to the patent. The fix is simple in concept: separate the patented stream from the rest of the business and show your working.

A practical rule helps: if you cannot explain how you split revenue and costs between patented and non-patented activity, you are not ready to claim confidently. Start with a product-line mini profit and loss view for the patented stream and refine from there.

The R&D fraction: why some companies do not get the full 10% outcome

In many cases, Patent Box does not automatically apply to 100% of the profit you have identified. You may need to apply the R&D fraction (sometimes called the “nexus” adjustment), which limits the benefit to reflect how much of the underlying R&D was actually carried out by your company, rather than acquired or done by connected parties.

In plain terms: the more of the R&D you did yourself (or directly funded through unconnected suppliers), the more of the profit can benefit from the 10% outcome. If a large part of the IP was acquired, or development work was mainly done elsewhere, the fraction can reduce the share of profit that qualifies.

Licensing and group structures: exclusivity and who earns the income

An exclusive licence can qualify, but the licence terms and the economic reality have to line up. Problems often arise where a licence is not truly exclusive, or where the company claiming Patent Box is not the company that actually earns the relevant income. This is why aligning IP ownership, licensing, and revenue flows early saves a lot of pain later.

Messy product mapping: patents rarely match your Stock Keeping Unit (SKU) list

In real businesses, patents map to features, subsystems, or manufacturing methods, while accounting systems map to products and customers. If the mapping is unclear, you end up with an argument about what income relates to the patent. Fix this early by agreeing a practical mapping approach and documenting it. The aim is not a legal thesis. It is a method that is consistent, sensible and repeatable.

Worked R&D tax credit and Patent Box example

This is illustrative only, but it shows how the two incentives can support the same innovation journey.

Year 1: you invest in R&D (Claim R&D tax relief)

A company spends £500,000 on qualifying R&D costs in an accounting period that falls under the merged R&D tax relief scheme. The merged scheme applies the scheme rate to qualifying expenditure to calculate the expenditure credit. Because the credit is taxable as trading income and the overall cash impact depends on the company’s tax position and payroll profile, the net benefit can differ by company. The key point is that the relief supports the cost of development while the business is investing.

Year 2: you start earning profit from a patented product (Claim Patent Box)

The patent is granted and the company earns profits from selling a product that incorporates the patented invention. The business identifies that £300,000 of its trading profit relates to that patented product line once revenue and costs have been separated in a sensible way.

Patent Box can reduce Corporation Tax on that qualifying profit by producing an effective 10% Corporation Tax rate on the qualifying slice, rather than the normal Corporation Tax rate. If the R&D fraction applies and is, for example, 0.7, only 70% of that £300,000 would get the Patent Box outcome and the effective tax rate becomes a blend of 10% and the normal rate.

Talk to us about joining up your R&D and IP strategy

If you are investing in R&D now and expect patented products to drive profit later, it is worth designing the evidence and data flow before deadlines and filing pressures kick in. We help businesses translate technical work into clear, compliant R&D claims, and build a Patent Box approach that is commercially realistic, well-documented, and aligned to how HMRC expects the rules to be applied. Book a free consultation to speak to one of our experts.