Opinion: SMEs must grasp Patent Box opportunity

Firms must act now if they are to take full advantage of the tax break

Computing recently conducted a poll of its readers to assess the impact on the technology sector of the government's Patent Box tax incentive. The results make depressing reading.

The Patent Box provides favourable corporation tax rates for profits derived from the exploitation of patents. The rate is 10 per cent as opposed to the normal rate, which is currently 20-24 per cent. While legitimate tax avoidance has become something of a dirty concept recently, the fact is the government has enacted this incentive specifically to encourage innovation and to persuade companies to retain high value jobs within the UK.

But when asked whether the scheme would encourage more innovation among the UK IT Industry:

• 69 per cent of respondents said that it does not provide enough of an incentive to retain high-tech jobs in the UK;

• only 11 per cent said that they were looking to develop new products; and

• 14 per cent said that they needed to have a better understanding of what the Patent Box means to them.

These results match with my own experience. Over the past few months I have discussed the Patent Box and its potential impact with many accountants and tax advisers. It is clear that industry is divided into two camps. Large companies are alive to it, are all over it and are determined to take maximum advantage. But it has largely passed SMEs by; the reaction has universally been one of insouciance bordering on complete indifference. This has been an immense source of frustration to those accountants and advisers.

The risk is that the bulk of this relief, which was aimed at least as much at SMEs as large entities, is likely to be mopped up by the latter and SMEs will miss out. And yet it is SMEs that the government looks to as an engine of growth and where it hopes that a lot of the high-tech/high-value jobs will be created.

One is tempted to say that SMEs need a sharp kick up the backside. It does not speak very well for the quality of British management. A lot of the reaction is "OK - I will get round to this in due course". But in this area there may not be a "due course". Because the correct protections and arrangements need to be in place by the 1 April 2013 if entities wish to take advantage of the new relief as soon as it comes in. True, one can apply for patents at a later date and of course people will do just that as further innovations come on stream. But there are two aspects that are frequently overlooked. First, the earliest date from which the relief can be claimed is the filing of the patent application. And second, one cannot file a patent if the innovation in question has already been made public. Thus innovative companies should be taking action NOW. At the very least they should be auditing what they have and deciding what steps, if any, they need to take to put their house in order.

One might argue that the reasons for the responses coming out this way is that this survey targeted the IT industry and of course "software cannot be patented". However, that statement is something of a myth. It is correct that computer programs in themselves cannot be patented. But most programs are developed as part of more complex processes and products and those processes and products as a whole may well be patentable.

There are tens if not hundreds of thousands of patents granted by the United Kingdom Intellectual Property Office and the European Patent Office that are categorised as "software-related inventions" but which are nevertheless considered to be valid. The real issue is that up to now so-called software houses have not bothered to investigate, possibly because of the perceived high cost of acquisition and also the fact that in practical terms they were unlikely to have the resources to enforce their patents even if they acquired them in the first place. But the Patent Box has now added to the commercial considerations as to whether patenting is worthwhile.

Unfortunately, that message does not yet appear to have got through to the industry. And in any event, what about the hardware side?

• Gary Moss is partner at law firm EIP