R&D Tax Relief & Patent Box 2024: Key Changes Every Tech Business Must Know

Overview

Tax relief might not make you want to jump out of your seat and shout “Eureka,” but who wouldn’t want to save cash while pushing the boundaries of innovation?

Effective 1 April 2024, the UK has simplified its R&D tax relief framework – by merging the SME (Small and Medium-Sized Enterprise) scheme and RDEC (Research and Development Expenditure Credit) scheme into a single system.

If your company is all about innovation, these schemes may benefit you:

• Merged R&D Relief: A single 20% headline rate, but the actual benefit (16.2% or 15%) is lower due to Corporation Tax.
• ERIS: R&D-intensive, loss-making SMEs spending over 30% on R&D can get a 14.5% payable credit.
• Patent Box: Companies with patents can get a lower 10% Corporation Tax rate on related profits. The UK-linked R&D portion (Nexus fraction) affects how much profit qualifies.

Guide Contents

This guide will outline:

1. Understanding R&D Tax Relief 2024 – Who qualifies, how much you can claim, and R&D tip.
2. The Patent Box Scheme: Key Changes for Tech Companies – How tech companies can benefit from reduced tax on profits from patents.
3. Key Documentation – What records you need to keep to support your R&D claim.
4. Frequently Asked Questions

1. Understanding R&D Tax Relief 2024

The UK government encourages innovation by offering tax relief on R&D spending.

Does My Work Qualify for R&D Relief?

HMRC defines R&D as activities that aim to achieve an advance in science or technology by resolving uncertainty Check what Research and Development (R&D) costs you can claim – GOV.UK. To qualify, a project must attempt to overcome scientific or technological uncertainties that cannot be easily worked out by a competent professional in the field.

How Much Can I Claim?

For most SMEs and large companies under the merged R&D Expenditure Credit (RDEC) scheme, you can generally claim a 20% tax credit on the R&D costs that qualify.

Loss-making SMEs that spend at least 30% of their total costs on R&D may qualify for Enhanced Research and Innovation Support (ERIS), which provides a 14.5% payable cash credit on surrenderable losses.

R&D Tip

From a practical point of view, in-house staff generally allows you to claim relief on 100% of qualifying salary costs, potentially yielding a higher benefit.

However, while offering flexibility and specialist skills, costs for outsourced labour (EPWs) are usually limited to 65% of the payment for relief calculations.

The best approach often involves a strategic mix, prioritising in-house for core R&D and using outsourcing for specific needs, while carefully tracking time and understanding eligibility for both.

2. The Patent Box Scheme: Key Changes for Tech Companies

If you’re making money from patented innovations, the Patent Box scheme lets you pay just 10% Corporation Tax on those profits.

The Patent Box is a UK tax relief scheme that allows companies to pay a reduced Corporation Tax rate of 10% on profits earned from patented inventions, instead of the standard 25% rate. This can result in significant tax savings for businesses that generate income from intellectual property.

How Does It Work?

To benefit from the Patent Box, a company must:

• Own or exclusively license a qualifying patent granted by the UK Intellectual Property Office or the European Patent Office.
• Have substantially developed the patented invention or actively managed its commercialisation.
• Generate profits from the patent, including product sales, licensing income, or damages from patent infringement claims.

Who Qualifies?

• Companies holding or exclusively licensing a UK or EPO patent.
• Must have developed or actively managed the patented innovation.
• Must generate income from the patent (e.g., sales, licensing, or royalties).

3. Key Documentation

Accurate documentation is crucial for claiming R&D tax relief. Incomplete or poor records can result in reduced or denied claims. Businesses should keep detailed records that clearly demonstrate:

• The nature of the R&D work undertaken.
• How the project sought to advance science or technology.
• The uncertainties addressed during the process.
• Breakdown of costs across qualifying categories (staff, software, consumables, etc.).
• Claim Notification Form: Companies that are new to R&D tax relief (or haven’t claimed in three years) must notify HMRC in advance.
• Additional Information Form (AIF): Every claim must include detailed project descriptions, a cost breakdown, and supporting evidence.
• PAYE/NIC Cap: Cash repayments for loss-making companies are capped at £20,000 + 300% of PAYE/NIC liabilities.

4. Frequently Asked Questions (FAQ)

4.1 What types of costs qualify for R&D tax relief?

Eligible costs include:

• Staff salaries for employees directly engaged in R&D.
• Externally provided workers (EPWs) – Temporary staff or agency workers involved in eligible R&D activities.
• Subcontractor costs – Some restrictions apply, particularly for work carried out overseas.
• Software & cloud computing – Costs related to software and cloud services used in R&D projects.
• Materials & consumables – Items used up during the R&D process (e.g., prototypes, lab supplies).

4.2 Can startups claim R&D tax relief before generating revenue?

Yes. Start-ups and pre-revenue companies can still claim R&D tax relief.

• Loss-making SMEs that meet ERIS criteria can receive a 14.5% payable credit on surrenderable losses.

4.3 Can overseas subcontractors be included in R&D claims?

• Generally, no, unless there are exceptional conditions requiring overseas R&D.
• The UK government encourages domestic innovation, so only certain overseas expenses are eligible.

4.4 Do I need a separate R&D project for each claim?

• No, but each claim must detail how the project meets HMRC’s definition of R&D.
• You must clearly explain the scientific or technological uncertainty being addressed.

4.5 How does the pre-notification requirement work?

• New claimants (or those not claiming in the last three years) must notify HMRC within six months of the end of the accounting period.
• Failure to do so means the company cannot claim R&D tax relief for that period.

4.6 What records should I keep for compliance?

HMRC requires:

• Detailed project descriptions outlining the scientific or technological advancements.
• Evidence of technical uncertainties and challenges faced during the project.
• A breakdown of eligible costs (e.g., staff, subcontractors, consumables).
• Payroll records to comply with the PAYE/NIC cap on payable credits.

Patent Box FAQs

4.7 What Counts as Eligible Profits?

Profits that qualify for the 10% tax rate include:

• Profits from processes or services that rely on patented technology.
• Sales of patented products (including items that incorporate patented components).
• Licensing and royalties earned from the patent.
• Income from patent infringement damages or compensation.

4.8 How do I elect into the Patent Box?

• A company must formally elect into the scheme within two years from the end of the accounting period in which the patent profits were earned.
• This is done via the Company Tax Return (CT600).

4.9 Can I apply the Patent Box to overseas patents?

No. Only patents granted by the UK Intellectual Property Office (UKIPO) or the European Patent Office (EPO) qualify.

4.10 What happens if my company stops holding a patent?

• The company will no longer be eligible for the 10% tax rate on profits derived from that patent.

4.11 How does the Patent Box interact with other tax reliefs?

• Patent Box and R&D Tax Relief can be claimed together.
• Companies should claim R&D tax relief to reduce the cost of innovation first.
• Once the innovation generates revenue, companies can apply the Patent Box to reduce tax on profits from patented inventions.

Final Thought: The future may be uncertain, but your R&D tax relief doesn’t have to be.

📞 Contact TaxFlare’s R&D tax specialists today! We’ll help you maximise your claim, stay compliant, and put more cash back into your business.