UK: Draft Finance Bill changes to patent box - including CSA interests

From today's draft Finance Bill overview:

"2.13. Patent Box: cost sharing for collaborative Research and Development (R&D)

As announced at Autumn Statement 2016, the government will legislate in Finance Bill 2017 to add specific provisions to the revised Patent Box rules introduced in Finance Act 2016, covering the case where R&D is undertaken collaboratively by 2 or more companies under a ‘cost sharing arrangement’ (CSA). The provisions will ensure that companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way.

The new rules provide that:

• where a company acquires an interest in or increases its interest in a CSA, an appropriate amount of the consideration paid counts as acquisition cost for the purpose of calculating the R&D fraction, to the extent any Intellectual Property (IP) assets are held within the CSA
• where a company disposes of an interest or reduces its interest in a CSA, an appropriate amount of any consideration received is treated as IP income, to the extent any IP assets are held within the CSA
• activity of participants in the CSA to develop IP or products is appropriately treated in the company’s R&D fraction

This has effect for accounting periods commencing on or after 1 April 2017. Draft legislation (provision 24) and a TIIN has been published on 5 December."

This should be filed under "not particularly surprising", it's been a gap in the legislation/guidance for some time.

UK - Autumn Statement and IP tax

The devil will no doubt follow in the Finance Bill detail, but the heads up on IP tax points from the Chancellor's statement is:

Fiscal:
- the new (post-1 July 2016) patent box rules are to be updated by adding provisions to deal with cost sharing arrangements so that companies using these are not advantaged/disadvantaged when it comes to calculating the R&D fraction

- 'new spending' of £4.7 billion between 2017 and 2021 to enhance the UK’s position as a world leader in science and innovation (whatever that means …), apparently to be rolled out as £425m in 2017-18, £820m in 2018-19, £1.5bn in 2019-2020, and £2bn in 2020-2021. This is apparently direct funding (grants) into an Industry Strategy Challenge Fund, to be modelled on the USA's Defense Advanced Research Projects Agency programme, as well as allocating funding more generally.

- £0.7 billion to support the market to roll out full-fibre connections and future 5G communications

Non-fiscal:
- review tax environment for R&D to build on the R&D Expenditure Credit for large companies 'to make the UK an even more competitive place to do R&D'
- more Science & Innovation Audits

Statistics: make of them what you will - UK patent box vs R&D reliefs

The UK tax authority has recently released statistics for take up of the patent box in 2013-14 (the first year of the relief); on the same day, it released the latest statistics on use of the UK’s R&D tax reliefs for the same tax year. The reports make for some interesting compare and contrast points:

Total claims in 2013-14
- patent box: 700
- R&D tax reliefs: 22,415

Total value of claims in 2013-14
- patent box: £342.9m
- R&D reliefs: £2.45bn

SME claims in 2013-14
- patent box: 475 (68%)
- R&D reliefs: 19,990 (95%)

Value of SME claims in 2013-14
- patent box: £15.7m (5%)
- R&D reliefs: £1.165bn (48%)

The largest claimant sector (for both patent box and R&D) is, unsurprisingly, manufacturing (63% of patent box claims; 30% of R&D claims). The second largest for R&D is Professional, Scientific & Technical, with about 20% of claims - but this sector only made 6.3% of patent box claims. This might relate to the nature of the patent box, and particularly the extra hurdle for claiming on services income. The other sectors are somewhat more difficult to analyse as numbers of patent box claims are so low that sectors have been combined to prevent commercial information being disclosed.

The R&D relief requires a company to be undertaking a project which seeks an advance in the global state of knowledge in an area of science or technology, it would seem logical that a successful R&D-relief qualifying project would often lead to something capable of being patented – and, in the 14 years for which we have R&D statistics, 141,000 claims for relief have been made. Fair enough, R&D relief claims can be made for unsuccessful projects, but out of 141,000 R&D relief claims, it seems pretty likely that there are more than 700 companies within the scope of the patent box … the report doesn’t speculate upon why the take up is so low in terms of numbers (and for comparison, the impact note when the patent box was introduced estimated the first year cost to the Treasury at £500m).

UK Spending Review & IP

Crickets - by Billy Hathorn

The UK Spending Review happened today – also known as the Autumn Statement – basically it's an update on the economic state of the nation in the UK and a staging post for economic, tax, etc announcements.

In past years, the Spending Review (or whatever it was known as in that particular year, the name changes) has brought us things like the patent box, R&D relief, and so on.

This year … crickets, from a tax perspective. Nothing much, really (a small change on entering into the intangibles tax regime for corporate partners).

There's some spending announcements though (with the usual caveat that it's a bit hard to tell what's new money and what's been announced before):

• £5bn in health R&D, including £50m in antimicrobial resistance research; 
• £150m to launch a Dementia Institute (presumably to do R&D);
• investing £6.9bn in capital (capital what?) to ensure that the UK remains a world leader in science and research, and protecting the current £4.7bn research funding "in real terms" for the same purpose - but note that £6.9bn includes the £150m for the Dementia Institute;
• investing £250m in a nuclear R&D programme (looks like it will be mostly for small modular reactor development, and focussed on spending in the North of England);
• protecting funding for the arts in real cash terms for 5 years;
• the £1bn Ross Fund investing in R&D in drugs, vaccines, diagnostics and treatments for infectious diseases – patterned with the Bill & Melinda Gates Foundation, so not all of that £1bn is coming out of UK pockets;
• playing a leading role in international research efforts to reduce the costs of low carbon energy (no £ information indicated, though);
• a new entity called "Research UK", based on the Paul Nurse review recommendations. This will work across (not with? maybe just poor wording …) the Research Councils to promote a strategic approach to science funding. Innovate UK will be integrated into Research UK. The Research Excellence Framework will be reviewed.

[ETA 26/11/15 – the Innovate UK grants are to be replaced by loans, according to a press release from BIS, which doesn't have more detail on the point]

The Review also notes that scientific R&D has grown by 21.3% and architecture and engineering activities by 38.8% (possibly since the beginning of 2010, although that's not entirely clear, and neither is it clear what metric they are measuring – employment numbers? capital expenditure? revenue expenditure?).

Stats for the curious: "research" is mentioned 46 times, "science" 35 times, and "technology" 30 times in the policy paper (PDF).

UK BEPS-compliant patent box proposals published

The UK announced on Thursday (22nd October) its (rather long awaited) proposals to update the patent box to make it compliant with the OECD BEPS proposals on amendments to patent/knowledge boxes. The UK proposals set out a series of questions for consultation, with draft legislation to come in December.

tl;dr version: it's more generous that it might have been on grandfathering, but companies had better get their accounting software ready to do some serious work in order to keep track once into the new regime. The added complexities that will be added may well put off companies from claiming.

There are no proposals to include software copyright as qualifying IP, although the BEPS project does permit this – and the Irish knowledge box draft rules, published on the same day, do include software (and the Irish knowledge box offers a 6.25% effective rate. Just in case you wondered).

Tax fiddle? No, tax relief for fiddlers!

Her Majesty's Treasury issued a media release last Friday which will be good news for performers of music and those who organise them commercially. The media release, Tax relief to support Britain's world-class orchestras, announced the launch of a consultation, Orchestra tax relief, on proposed tax relief for orchestras that are UK registered companies which are liable to pay corporation tax. The proposal is modelled on theatre tax relief, which was introduced last year.

Orchestral tax relief: giving a new\
meaning to the words "tax band"?

Qualifying orchestras (which should be engaged in producing live orchestral performances, thus excluding studio orchestras) will enjoy an additional corporation tax deduction which can be surrendered for a payable tax credit. While integral costs for to the creative process and production (eg player fees, rehearsal costs, venue hire) will attract the relief, indirect expenditure such marketing or financing will not. Nor will ordinary running costs. A higher rate of credit is proposed for touring performances (defined as playing in three different venues within two weeks). Orchestras may group multiple performances in one claim and more than half of their performances must be played by at least 14 performers drawn from defined orchestral sections.

Comments on this proposal should be made by the stipulated time of 11.45 pm on 5 March 2015. Assuming that all is well, further details are expected some time in the spring of this year and the relief is due to kick in on 1 April 2016.

Quantifying maximum benefits of law reforms: questions about Hargreaves

Veteran copyright and information science expert Professor Charles Oppenheim has keen keeping an eagle eye on the predicted benefits of the promised/threatened UK digital copyright reforms outlined in the hastily-conceived and even more hastily-composed Digital Opportunity (the Hargreaves Review, which you can read all about on its very own web page here). Apparently questions have been asked in the House of Commons:

""John Whittingdale (Maldon, Conservative [and Chairman of the All Party Parliamentary Intellectual Property Group]) asked Secretary of State Vince Cable MP why the estimates of maximum financial benefits from the implementation of the Hargreaves Report have been cut, following on from the news that the revaluation had brought the gains down from £27 billion to to £790 million through the Modernising Copyright plan.

Jo Swinson (East Dunbartonshire, Liberal Democrat), responding, stated that the reason for the reduction in net gains to the British economy is due to the fact that Modernising Copyright does not contain the creation of the single EU patent or the Digital Copyright Exchange (DCE)".

Comments Charles:

"REALLY? Are the single European patent and the DCE going to be that valuable to the UK economy (and over what period?) I'm amazed!".

Comments this blogger (who shares Charles's amazement), what does the new patent package have to do with the valuation of the benefits of a new digital copyright regimes anyway?  He also thinks that the real reason why the DCE will not confer vast value on the British economy is that most digital products are ripe for being exploited globally via the internet, while the DCE can hardly confer benefits that extend beyond the jurisdiction.

If you're small and do other people's R&D ...

The UK's Intellectual Property Office has just published a note on the relaxation of R & D tax rules in the current issue of its IP Insight e-magazine. The current rules for claiming additional tax relief on research and development (R&D) are due to be relaxed. Small and medium-sized enterprises (SMEs) carrying out R&D will be able to claim the additional relief on their activities, even if they don’t own the intellectual property that will result from their R&D.

The new regime will apply to any expenditure on R&D which falls within an accounting period ending on or after 9 December 2009. This shift should help subcontractors carrying out research for larger companies. At present, to be eligible for the additional tax relief on R&D, SMEs must own any intellectual property created by their R&D activities.

The SME Scheme is open to organisations with fewer than 500 employees, an annual turnover of less than 100 million euros and a balance sheet not exceeding 86 million euros, so long as they have an annual spend on R&D of at least a token £10,000. There may be more to come, since public consultations on IP taxation are promised for later this year.

You can find further detail on R&D relief for Corporation Tax on the HM Revenue & Custom website here.

Madonna seeks giant privacy payout in UK litigation

The Guardian has reported that pop icon Madonna is claiming more than £5 million in damages from the Mail on Sunday newspaper, which admitted a breach of privacy and copyright infringement following its publication of private photographs of her wedding to film director Guy Ritchie. If Madonna succeeds, she will have created a new UK record for a pay-out in a privacy case (the current record is the £60,000 recently awarded to Formula One boss Max Mosle after revelations concerning his sex life were published in the News of the World).

The singer had accused the Mail on Sunday of breaching her privacy and copyright by publishing pictures of her wedding in the Scottish Highlands, eight years after the event, following news that her marriage to Ritchie had broken down. The wedding was said to have been "wholly private" though the photos were said to have been surreptitiously copied by an interior designer at Madonna's home in Beverly Hills.  The paper is said to have paid just £5,000 for them. A decision from Mr Justice Eady is expected in the New Year.

[Thanks, Birgit Clark, for supplying this information].

Damages for observing patent injunction

From the 3rd edition of LECG's UK Newsletter comes this little insight into the deployment of a financial consultancy in intellectual property litigation, in Les Laboratoires Servier and another v Apotex Inc and others [2008] EWHC 2347 (Ch), heard on 9 October by Mr Justice Norris and briefly summarised here and here:

"... Our UK case highlights include being instructed by Taylor Wessing to calculate Apotex UK Limited’s damages as a result of an injunction they had observed. For a period of 11 months, Apotex was injuncted from selling a particular generic drug, because of claims of patent infringement brought against it by Servier, which manufactured the branded version of the drug. Apotex had always contended that the patent was invalid, and when this assertion was subsequently validated by the Court, Servier was liable for the damages suffered by Apotex as a result of the injunction.

Apotex won a substantial damages figure of £17.5M. ... The amount of interest awarded was also a matter of contention, and in a separate hearing, Norris J awarded a further £2.1M in interest. In respect of the interest calculation, Norris J deemed the Apotex parties ‘substantially right’.

Of particular interest in this case were the market dynamics, which were specific to the industry in question. The interaction between ‘branded’ drugs, ‘generic’ drugs and ‘authorised generic’ drugs (sold as generics under authorisation of the original patent holder) played a part in the formation of the ‘but-for’ scenarios. The market dynamics were important to every aspect of the case, but in particular (i) the role of potential market entrants, in the (hypothetical) absence of the injunction and (ii) the extent to which the injunction affected Apotex in perpetuity".

This looks like a great victory for LECG, but it should not be forgotten that the calculation of damages for failure to be allowed into a market still remains a largely conjectural exercise. As the judge said at para. 60:

"Recognising the imprecision inherent in the exercise but the precision of some of the assumptions used I have then stood back and compared that sum with the £74 million Servier earned during the period of the injunction to which it was found ultimately not entitled, to the £11 million which it paid to AG2 to keep it out of the market, and to the $20 million paid to G4; and I have asked myself whether in the round this sum overcompensates Apotex for the loss that it has suffered, reminding myself that the jurisdiction is compensatory not punitive. The range of figures presented for my consideration went from £400,000 (Servier) to £27 million (Apotex). I am satisfied that my figure is broadly right, though I would propose to round it down to £17.5 million to underline the fact that one can only do broad justice where there are so many significant variables. £17.5 million is accordingly the figure which I award as compensation on the enquiry".