Intellectual property (IP) is the most valuable asset of many of the world’s largest and most successful companies. It is what distinguishes them from their competitors, what makes them unique and is often the key objective in mergers and acquisitions (M and As).
For small to mid-sized companies, the role of intellectual property rights (IPRs) and intangible assets is less well understood. The value of IPRs is often understated in company accounts and the rights themselves are frequently not managed or exploited to their full potential by companies themselves.
It is crucial that every company is able to recognise the value of its IP in order to maximise opportunities for exploitation. IP can take various forms including rights formally protected such as copyright, design rights and patents but can take other forms, not formally protected, such as goodwill and trade secrets.
There are numerous ways in which a company can choose to exploit its IP in order to create value. These include steps to formally protect IP, licence agreements leading to licence fees and royalty payments, as well as an outright sale. Whatever form the IP takes, protecting it is vital to a company’s long-term success.
An IP audit is an essential exercise that every company should undertake in order to recognise existing IP, consider any new IP that might exist from any R and D activity being undertaken and consider the best means of exploitation.
Consideration of the UK Patent Box is an essential part of any IP audit.
The Patent Box
Designed to reward and encourage innovation among UK Plc, the Patent Box tax relief was rolled out from 2013 and offers businesses a reduced rate of corporation tax of just 10% on profits made from patents.
For companies which either own or hold an exclusive licence for specific patents, who have carried out R and D to develop the underlying invention patented and who choose to exploit their patents commercially, election into the Patent Box could realise a substantial reduction in the corporation tax payable on IP related income.
At 10%, the Patent Box provides for a near halving of the rate of corporation tax payable on IP related income. The reduced rate is payable on income resulting from the sale of patented products, products incorporating patented components as well as spare parts where the principal purpose is incorporation into a patented product or product containing a patented component. Sales income arising from patent disposal; licence income and royalties arising from the grant of a licence and income received as compensation or damages for patent infringement also attract the reduced rate.
Finally, any increase in income arising from the exploitation of the patent in house, such as using a patented process or piece of equipment could also give rise to IP income for Patent Box purposes.
This can save companies tens or even hundreds of thousands of pounds each year, money which can be reinvested in the business to fuel further growth and innovation. Any patent exploited in this way adds to the value of the IP portfolio as a whole.
However, more than half (54%) of companies remain unaware of Patent Box tax relief according to our own research. Largely due to this, around four in ten businesses with successful patents fail to apply for this valuable tax relief.
On average, more than 5,600 patents were granted every year from 2012 to 2017, according to government figures. By contrast, Patent Box claims over this period peaked at 1,160 in 2015/16, with a total value of £754.3 million, meaning there are still thousands of eligible companies who have not claimed and are missing out on millions of pounds. The number of claims for 2016/17 so far is 1,025 with a value of £942.5 million.
If a company has registered patents, it should immediately investigate how much of its income is generated from this product or service in order to cut its tax bill.
There are anti-avoidance provisions in place to prevent companies from misusing the Patent Box. These include provisions to prevent a company from incorporating a patented item into a product where the patented item is commercially irrelevant and to prevent an exclusive licence from including spurious rights. However, HMRC has made it clear that it will not interfere with practical and commercially appropriate transactions, even if they have the effect of creating or enhancing Patent Box benefits.
The similarities between the accounting definition of R and D and the novelty and inventive step requirements of patenting are such that it would be a real oversight for any company involved in developing new technology for commercial exploitation purposes not to consider patenting and the Patent Box.
It is essential, therefore, that conversations with corporate clients about IP should include a question about whether an IP audit been undertaken to establish whether the company’s IP value is correctly stated in the accounts together with consideration as to whether the company has considered the Patent Box.
Only then will you be able to accurately answer the question posed at the outset — Intellectual property: Do you know what it is worth to your clients?