R&D Tax Relief and Patent Box Reliefs - Everything you need to know!
Read on to find out
- What are R&D Tax Credits?
- What are Patent Box Reliefs?
- Can R&D Tax Credits and Patent Box Reliefs be used together?
R&D Tax Credits
Research and Development Tax Credits are both incredibly simple, and incredibly helpful. Introduced for the sole purpose of allowing innovative businesses to grow, they reward companies that experiment, and cover new grounds.
As a company that qualifies, you can gain either a reduction in Corporation Tax, or use your claim to receive a cash payment. In an ever-growing cycle, the more you innovate, the greater Tax Credit you can receive. You can then invest a greater amount into innovation, and receive even more Tax Credits the following year and so on and so forth.
R&D Tax Credits Eligibility
Research and Development may sound like it belongs strictly in the Science sector, but NO! It doesn’t have to be a laboratory, or creating gadgets for Bruce Wayne’s alter-ego, the rules are exceptionally broad, and across many different fields! If you’re developing a brand new product, process, or service, or even just enhancing existing ones, you’re officially investing in innovation!
In short, as long as you:
- Are a Limited Company
- Have invested money in innovative R&D activities
Then congratulations! You’re eligible for R&D Tax Credits! This means you can now take into account money spent on to calculate your R&D qualifying expenditure. This includes:
- In-house employees (Salaries / Pension Funds)
- Subcontractors / External Staff (65% of their costs)
- Materials and Utilities (Heating, Lighting etc.)
Once you’ve accounted for everything you used in the process, you just need to calculate 13% of that total. This total is your R&D Expenditure for the year. Not only are you innovating new sources of income, but you’re also receiving money back, or reduced corporation Tax every year!
Innovation never paid so well, and that end of year boost is always welcome!
Patent Box Reliefs
Patent Box Reliefs are the lesser-known cousin to R&D Tax Credits. In short, certain elements of your company’s income will be taxed at only 10% Corporation Tax, rather than the standard 19% rate.
They are similar to R&D Tax Credits, in that you have to be innovative to qualify - Your company must hold your own qualifying patented inventions, and be making a profit from them.
In an effort to prevent stagnation, the UK government added an extra condition to qualify for Patent Box relief, and that’s the development of them. It’s not enough to gain profit off your unique patents, you need to have a qualifying IP Right to show significant contribution to either
- development of the patented invention
- a product incorporating the patented invention.
If you have your own patents and are still developing them, then all of the profits earned from your Intellectual Property, can pay the reduced Corporation Tax of 10%.
They’re even available if you don’t hold the patents yet. If you are still patent-pending, you can submit a pre-grant election for your particular patent. Your Patent Box relief will keep on growing until the patent is granted, and is available to claim in the following period!
Can R&D Tax Credits and Patent Box Reliefs be used together?
It might seem unbelievable, but yes! The two schemes are similar in principle, and so the government created a ‘modified nexus’ approach in 2016. When you begin your Year End checklist, the R&D Tax Credits, and Patent Box reliefs work together like a charm.
The key to remember is that your hard-earned R&D Tax Relief is not included in your relevant taxable profits. This method actually increases the benefit of your Patent Box Relief! For the innovative company, R&D Tax Credits work hand-in-hand with Patent Box Relief to deliver incredible reductions in tax.
Less for the taxman means a lot more for your company.