Tax the income from your patents at 10% rather than the usual SME rate of 21%? Few will object to encouraging the exploitation of technology if it is to create the big businesses of tomorrow.
We already have a scheme to help the early-stage generation of ideas. A tax credit allows you to swap R&D costs for cash. Now a ‘patent box’ is being drafted to support the subsequent exploitation of those ideas and improve returns. It is due for launch in April 2013, although any patents filed from late 2010 onwards will qualify.
The effects are already being felt. On the back of the patent box, GlaxoSmithKlein has confirmed a pledge to build a £500m manufacturing plant here in the UK.
For start-ups and spin-outs who feed in technology to corporates, such decisions will have major downstream consequences, says Jo Wildy at the Bio Industries Association.
“Business models are now working differently. Corporates are outsourcing innovation to smaller specialists. They then bring promising candidates inhouse to take them to market. It is a vibrant community that would wither if the likes of Glaxo choose to go somewhere else.”
For specialist developers of technology, the direct benefit of the patent box will be to improve their rates of return by paying less tax on their revenue streams. “It might even encourage them to keep going for longer as independents,” says Wildy. “Rather than just sell up once they have proved an idea, they might decide to take themselves further down the line and source investment from one of the major players.”
Not all are convinced the patent box will work so smoothly. The fear is that it will prove too complicated for start-ups and spin-outs to bother, says Jim Hoff, a patent attorney at Phillips & Leigh who works on the policy of IP finance at centres of IP excellence such as the Chartered Institute of Patent Attorneys.
First, he asks, how do you work out how much of your revenue goes into the 10% box? Few products are purely based on patents. Most are embedded. How do you then account for their value?
Either you follow an international protocol or you follow a Treasury formula. “It will be expensive and complicated,” says Boff, “both for you to claim and for the tax authorities to check.”
The other difficulty is how little or how much expenditure you can put against the revenue from a patent. “Ideally you want to net off as much as you can. But if you are in life sciences, do you include the cost of investigating a thousand compounds? Or just include the one that eventually works?”
One outcome might be that enterprises adopt a different operating model. You spin out your patent then licence it back to yourself, so you can claim all the income as royalties.
The Treasury’s consultation on patent boxes closed at the end of February, so the final form that the patent box will take is still to be resolved. Boff’s hope is that it will reward creative enterprises, rather than just creative accounting.