R&D Tax Credits vs the Knowledge Development Box: Which Should You Claim?

If your company has been claiming the R&D tax credit for a few years and is now starting to earn real money from a patent or a piece of proprietary software you built, you don’t have choose between two reliefs. You've got access to both, and they reward different stages of the same work.

The R&D tax credit rewards the spend, as you incur it. The Knowledge Development Box (KDB) rewards the income, once the R&D has produced something that earns money. Here's how each works, where they overlap, and when to bring the second one into play.

The two reliefs side by side

Both are claimed through your Corporation Tax return. Beyond that, they're built to do different jobs.

How the R&D tax credit works

You already know this one if you're claiming it: the credit gives you back up to 35% of what you spend on qualifying R&D, staff time, subcontractors, consumables, software, and more, in the same period you spend it. It's designed to soften the cost of doing the R&D in the first place, regardless of whether that R&D ever turns into a commercial product.

You gather your qualifying projects, assign costs to those projects, then claim back those costs on your CT1. Revenue reserves the right to audit any claim to check they qualify and the costs are accurately claimed.

How the Knowledge Development Box works

The KDB is a different kind of relief. Instead of rewarding spend, it reduces the corporation tax rate on income that comes from qualifying intellectual property you developed through qualifying R&D carried out in Ireland.

Qualifying assets include:

• A patented invention
• A computer programme
• For smaller companies, IP certified as patentable but not yet patented

Qualifying income includes royalties, licence fees, income embedded in the sale price of a product or service that incorporates the IP, and compensation for IP infringement. Where you qualify, that income is taxed at an effective rate of 10%, down from the standard 12.5% rate, through a 20% deduction against qualifying profits.

The relief isn't automatically applied to all of your IP income, though. It's scaled by a nexus fraction: the proportion of your qualifying R&D spend (excluding payments to connected parties) against your overall expenditure on the asset (including payments to connected parties and acquisition costs). Large multinationals will find their costs diluted with these exclusions, so there is an additional uplift expenditure allowed.

The KDB relief is received through a separate trade, where an additional trading expense is recorded against the profits of the trade.

Why this isn't really a choice between the two

Companies sometimes ask which relief they should be claiming, as though it's one or the other. In practice, the two sit at different points in the same timeline. You claim the R&D tax credit while you're doing the work and spending the money. You bring the KDB in once that work has produced a patent, a piece of copyrighted software, or another qualifying asset that's actually generating income.

If your R&D never produces a commercially exploited asset, and plenty of genuine R&D doesn't, the R&D tax credit is the only relief in play, and that's fine. The KDB only becomes relevant once there's IP income to shelter.

Where the two reliefs actually overlap

There's one place the two regimes directly touch: royalty or licence payments you make to a connected party don't qualify as an R&D tax credit cost where that income falls under the KDB for the party receiving it.

If you're licensing IP from a related company that's itself claiming the KDB on the licence income, that payment can't also generate an R&D credit for you. Our guide to software costs in an R&D claim covers this exclusion in more detail.

Beyond that specific overlap, the two reliefs don't compete for the same expenditure. The R&D tax credit reduces your R&D spend; the KDB reduces the tax on what that spend eventually earns.

What this looks like over time

A practical example might look like:

A software company spends €400,000 a year building a new fraud detection engine, all of it qualifying R&D. It claims the R&D tax credit each year on that spend, at the applicable rate for the period.

Three years in, the engine is stable, the underlying code is copyrighted, and the company starts licensing it to a partner platform for €150,000 a year. That licence income can now be assessed under the KDB. Based on the company's nexus fraction, 75% of the spend was qualifying, so €112,500 qualifies for the 10% effective rate rather than the standard 12.5%.

The R&D tax credit didn't stop when the KDB started. The company keeps claiming the credit on its ongoing development spend, while the KDB now applies separately to the income the finished IP generates.

Key takeaways

• The R&D tax credit rewards spend; the KDB rewards income. They apply at different points in the same R&D lifecycle, not as alternatives.
• The R&D tax credit is worth up to 35% of qualifying expenditure for periods ending on or after 31 December 2026. The KDB gives a 10% effective rate on qualifying IP income.
• KDB eligibility depends on having a qualifying asset, a patent, copyrighted software, or certified novel IP for smaller companies, plus a nexus fraction that scales the relief to how much of the R&D you did yourself.
• The two reliefs overlap in one place: connected-party royalty payments linked to KDB income on the other side can't also generate an R&D tax credit.

If you're not sure whether your business has IP that's ready for the KDB, or you want help getting the nexus fraction right, get in touch and we'll walk you through it.