R&D Tax Relief and Patents: Understanding the Parallels for Business Owners and Innovators

Innovation is the lifeblood of many businesses, particularly those in technology-driven industries. When it comes to claiming R&D tax relief or protecting intellectual property through patents, companies often find themselves navigating complex processes.

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 also delve into how businesses can benefit from both R&D tax relief and Patent Box Relief, highlighting the advantages of combining these incentives to foster future innovation.

Table of Contents

1. Key Takeaways
2. The Tax Definition of R&D
3. Dilution of the Tax Definition of R&D
4. The Relationship Between R&D and Patenting
5. Key Similarities Between the Tax Definition of R&D and Patent Requirements
6. The Role of Patent Box Relief
7. 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. While not required, patentability of an innovation can strengthen a claim for R&D tax relief by demonstrating a novel and inventive technological advance.
• 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&D

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. Mathematical advances and even certain aspects of software development are now included in the scope of eligible R&D activities.

While the scope of what is considered “science” has expanded, the central requirement that the project must represent an advance in knowledge remains unchanged since the introduction of the R&D tax relief schemes.

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

In recent years, the popularity of R&D tax relief has soared, with claims more than doubling from around 45,000 in the 2015/16 tax year to over 90,000 by 2020/21. This dramatic increase has raised concerns about the quality of claims being submitted, as many are not sufficiently scrutinised by HMRC (Her Majesty's Revenue and Customs).

The rise of R&D tax specialists, many of whom charge significant contingency fees, has created a more aggressive market for tax relief claims. While this has undoubtedly led to more companies applying for relief, it has also resulted in a dilution of the definition of what constitutes eligible R&D activity. Many companies and advisors have been led to believe that any technical problem-solving activity qualifies, regardless of whether it meets the strict definition required by HMRC.

This lack of clarity has contributed to errors and potential fraud in claims, with HMRC reporting that approximately 16.7% of claims submitted in 2020/21 contained errors or fraud, amounting to ￡1.13 billion in losses to the public purse. As a result, HMRC has ramped up scrutiny of R&D tax claims, and companies are now facing a much higher evidential burden to prove that their projects meet the necessary criteria.

The lesson here is clear: businesses seeking R&D tax relief must demonstrate that their projects represent a genuine advance in science or technology, and not just incremental improvements.

The Relationship Between R&D and Patenting

While R&D tax relief does not require a company to apply for patent protection over the results of its research, the question of whether an invention has been patented often arises during an HMRC enquiry. HMRC frequently asks: “If the invention was so innovative, why hasn’t it been patented?”

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: 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.
2. Demonstrating Novelty: 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.
3. Inventive Step: 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.

Given these similarities, if a company has consulted with a patent attorney and received advice that their invention is patentable, this could strengthen their case when claiming R&D tax relief. A patent application serves as tangible proof that the invention represents a genuine advancement in the field, making it easier to demonstrate that the project meets the criteria for tax relief.

For companies facing difficulty in proving the scientific or technological advancements of their R&D projects, obtaining a patentability opinion from a patent attorney could provide crucial support in 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.

In practice, companies that successfully apply for R&D tax relief and then patent their innovations can benefit from both tax incentives. The R&D tax relief can provide immediate financial support for the development phase of the innovation, while Patent Box Relief can reduce the tax burden on profits generated once the invention is commercialised.

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.

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 patent attorney to ensure you are taking full advantage of all available incentives.

At ASWATAX , we specialise in helping clients maximise the benefits of R&D tax relief and Patent Box relief, ensuring their claims are accurate, compliant, and tailored to their specific activities. Our expert team of Chartered Tax Advisors works closely with businesses to identify qualifying expenditures, prepare robust documentation, and navigate the complexities of HMRC's requirements, reducing the risk of enquiries or rejections.

Whether it’s uncovering hidden qualifying projects, optimising your claim to enhance cash flow, or integrating Patent Box relief for innovative intellectual property, ASWATAX provides end-to-end support to ensure clients fully leverage these valuable incentives while staying focused on growing their businesses. One thing we push for is the streamlining of our processes to ensure minimal disruption to our clients businesses, and a swift outcome.

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