In the second part of this two-part series on IP, Ian looks more closely at the tax reliefs and other financial opportunities available that can provide a greater incentive for SMEs to protect more of their IP, as well as encourage them to invest more in research and development in new products and processes.
Any profitable UK company paying UK corporation tax should be aware of the new Patent Box tax incentive introduced on 1st April 2013 as it introduces a potential tax advantage that can significantly increase the commercial value of patents, regardless of whether a company has the ability to enforce them against infringers.
The government has introduced this scheme with the specific aim of fostering and encouraging innovation in the UK in order to stimulate economic growth and provide SMEs with an incentive to protect more of their IP. Under the Patent Box legislation, a profit made on sales of a product incorporating a patented invention may be taxed at a reduced rate of corporation tax. Once fully phased in by 2017, this will be 10 percent (from the usual 23 percent).
SMEs that already hold patents should carry out an audit to assess whether any of them cover commercial products on which UK corporation tax is being paid to determine whether a claim for tax relief under the patent box provisions could be made.
Those SMEs that pay UK corporation tax but do not currently file patent applications should now consider seeking patent protection for any new technology currently in the pipeline with a view to claiming this tax relief, especially as a patent may be obtained for relatively small modifications or improvements to existing products or processes. In the longer term, the relief available could easily outweigh the cost of seeking any patent protection.
The tax relief available can be substantial as it is not limited to profits made as a result of selling a product only in the UK; profits obtained as a result of selling a patented product anywhere in the world and on which UK corporation tax is paid are included, even if a patent that has been obtained covers the UK only. Furthermore, relief can be sought in relation to the profits from the sale of a larger product that incorporates a patented component.
This means that if, for example, the patent covered only a switch, it should be possible for a company that sells a machine incorporating that switch, and who holds the patent for that switch, to claim tax relief on the profits obtained as a result of selling the entire machine. The sale of a larger article that incorporates a patented component as an integral part of that larger article can dramatically increase the tax relief available. Worldwide licence fees and royalties obtained from licensing patented technology can also fall within the patent box on which relief is available.
There are some calculations that must be made to determine the income that is eligible for the reduced tax rate. This includes allocating a proportion of an SME's total UK taxable profit to IP related income and deducting an amount to account for revenue that would be obtained in the absence of any IP. However, the Patent Box legislation attempts to make the process as simple as possible, especially for SMEs. Therefore, it should not simply be assumed that the additional advisory costs and administrative burden involved in claiming the Patent Box tax relief will outweigh the ultimate benefit.
In light of the favourable tax implications now introduced by the Patent Box, there is a real incentive for SMEs to re-assess their patent filing strategy and to seek protection for new products or processes where previously there may have been less incentive to do so.
R&D tax credits
The research and development (R&D) tax credit system has been available for many years, but a significant percentage of SMEs that are entitled to claim the benefit of it are not currently doing so, despite the fact that substantial tax relief may be available. Even where a company has not paid any tax, a successful claim can result in a cash receipt from HMRC. Many SMEs may not be fully aware of the system.
Alternatively, they may be of the opinion that they would not qualify for the relief because the work they are doing would not be regarded as research and development by HMRC, or they may just consider that the rules are just too complex. It should be understood, however, that relief is available for any actively innovative SME, including those involved in manufacturing and engineering, and that a successful claim can result in payments that substantially outweigh any costs involved in obtaining it.
Whilst the definition of what constitutes research and development is subject to interpretation, R&D is defined by HMRC with reference to projects which seek to: “achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty”. Establishing whether this is the case in relation to any particular SME activity must be carefully assessed to determine whether it qualifies under the rules and detailed guidelines are available from HMRC to explain how many of these terms are interpreted.
Assuming that a qualifying SME is deemed to be carrying out R&D within the meaning of the rules, the relief available to SMEs can be generous, as it allows for tax relief of 225 percent on costs associated with the R&D effort. This means that, for every £100 of qualifying R&D costs, the income on which corporation tax is payable is reduced by £125 in addition to the £100 spent. Alternatively, when an SME is making a loss, the relief can give rise to tax repayments of as much as 25 percent of the cost, even in circumstances where no corporation tax has been paid.
Technology Strategy Board
The Technology Strategy Board (TSB) is a government funded agency tasked with stimulating innovation in order to accelerate economic growth. The TSB operates a number of funding programmes which allocate funding to SMEs for various R&D activities. For example, the ‘Smart’ programme offers funding to SMEs in the fields of science, engineering and technology.
The TSB also run an innovation voucher scheme which is intended to encourage SMEs to expand into new areas by bringing in knowledge from external sources. A grant of up to £5,000 is available, which can be used to fund specialist IP advice.
In addition, the UK Intellectual Property Office sponsors an IP audit scheme which provides SMEs with a grant of up to £3,000 to cover an IP audit, assuming they can demonstrate a sound business need and are prepared to submit an application outlining the expected benefits of such an audit.
Whilst the above is not an exhaustive list of all the financial and business support available to SMEs, it does demonstrate that, in conjunction with professional IP advice, there is help available, which should encourage more SMEs to realise the value of their IP and to actively seek to protect it.
Ian Grey is a Chartered and European Patent Attorney at the Patent and Trade Mark firm Venner Shipley LLP