Patent Box – the ‘nexus’ and the ‘R&D Fraction’

In the context of the Patent Box scheme, the R&D fraction and the nexus are closely related but not exactly the same thing.

     →  The R&D fraction is a specific calculation used within the Patent Box scheme to determine how much of your qualifying intellectual property (IP) profits can benefit from the reduced 10% corporation tax rate.

     →  The nexus is the broader principle behind this calculation, introduced by the OECD to ensure that tax benefits like the Patent Box are linked to actual research and development (R&D) activities conducted by the company claiming the relief.

In essence, the R&D fraction is the practical tool that applies the nexus principle, turning it into a number that determines your tax relief. It’s applied during the “streaming” process (where you isolate profits from patented IP) to adjust the amount of profit eligible for the 10% tax rate.

Calculating the R&D Fraction

The R&D fraction is a number between 0 and 1, reflecting how much of the R&D for your patented IP was performed by your company (or group) versus acquired or subcontracted externally. The higher the fraction, the more of your IP profits qualify for the tax break.

The R&D fraction is calculated as: (D + S×1.3) / (D + S + A + R)

Where:

• D = Direct R&D expenditure by your company (or group) on qualifying activities.
• S = Payments for R&D subcontracted to unrelated parties (e.g., universities or independent labs).
• A = Expenditure on acquiring IP (e.g., buying a patent).
• R = R&D subcontracted to related parties (e.g., within your corporate group).
• The 1.3 multiplier boosts the value of in-house or unrelated-party R&D to encourage genuine innovation.

The fraction is capped at 1, so it never exceeds 100% of your qualifying profits.
 

Example for Clarity

Suppose TechTrend Ltd develops a patented gadget, earning £1 million in qualifying IP profits. They spent £500,000 on in-house R&D (D), £100,000 on subcontracted R&D to an unrelated lab (S), £200,000 to acquire a related patent (A), and £50,000 on R&D by a group company (R).

The R&D fraction is: (500,000+100,000)×1.3 / (500,000+100,000+200,000+50,000 )

     →  So, 92% of their £1 million profit (£920,000) qualifies for the 10% tax rate, saving them significantly compared to the standard 25% corporation tax.

Questions about the Nexus rule or Patent Box in general?

Understanding the nexus principle and calculating your R&D fraction correctly is essential to making a valid and worthwhile Patent Box claim — but it can be complex.

If you’re unsure how these rules apply to your business or need support with Patent Box calculations, we’re here to help.

Contact the ABGi Team to discuss your Patent Box eligibility and how to make the most of the tax relief available.