Understanding and maximising the true value of your Intellectual Property
Mark Tighe, CEO and founder of specialist tax consultancy Catax
Intellectual property (IP)is a business’s most valuable asset. It is what provides a business with its unique identity, setting it apart from its rivals. It is what defines the expertise, services and products the business can offer. It is usually the driving force behind company mergers and acquisitions (M&As).
It is vital that growing SMEs review and protect their IP as early as possible to ensure future stability and success. IP left unprotected can completely undermine and devalue a flourishing business.
For smaller companies, the value of IP does not always immediately translate into revenue and there is a widespread lack of understanding about the role of Intellectual Property Rights (IPRs) and other intangible assets. IPRs are often grossly undervalued in the company accounts and not properly managed so businesses fail to capitalise on them.
A classic example is an SME which registers a trademark for its branding then fails to monitor the registration, meaning another company’s infringements go unnoticed. Registered trademarks last ten years however if no action is taken to renew them, the company will lose the right to challenge the infringement resulting in the brand being devalued and needing to be completely overhauled.
Types of intellectual property
The term IP applies to intangible creations of the human intellect that the law protects from unauthorized use by others. Traditional forms include copyright, design rights, patents and trademarks but also include trade secrets and goodwill.
Some IP rights are automatic whilst others need to be applied for.
Automatic protection applies to:
Copyright– Writing and literary works, art, photography, films, TV, music, web content, sound recordings
Design Right – Shape of objects
Trade secrets – Secrets that add value to a business
Good will – The established reputation of a business regarded as a quantifiable asset
Protection you have to apply for:
Trade marks – Product names, logos, jingles
Registered Designs – Appearance of a product including, shape, packaging, patterns, colours, decoration
Patents – Inventions and products, eg machines and machine parts, tools, medicines.
It is crucial that every company recognises the value of its IP in order to fully capitalise on it. Whatever form the IP takes, recognising and taking steps to protect it, if applicable, is the first vital step but potential exploitation is the next step to consider. There are many ways to exploit IP beyond selling products. These include licence agreements leading to licence fees, royalty payments and an outright sale.
The UK Patent Box exists to reward companies making profit from the exploitation of its patents and is too often overlooked by companies.
More than half (54%) of companies remain unaware of Patent Box tax relief according to our own research, which largely explains why around four in ten businesses with successful patents fail to apply for this valuable tax relief.
An IP audit is an essential exercise that every company should undertake, and this will identify existing and emerging IP as well as lead to consideration of the best means of exploitation including a Patent Box claim.
The Patent Box
Designed to reward and encourage innovation by UK companies, it was rolled out in 2013 and offers a reduced rate of corporation tax of just 10 per cent on profits made from patents. This represents a near halving of the rate of corporation tax payable on IP related income.
For companies which own or hold exclusive licences for specific patents, who have carried out R&D to develop the underlying invention or who have carried out R&D to develop a patented invention post acquisition and who choose to exploit their patents commercially, electing into the Patent Box could lead to a significant cut in corporation tax payable.
The reduced rate applies to income resulting from the sales of patented products, products incorporating patented components and spare parts where the principal purpose is incorporation into a patented product or product containing a patented component. It also covers sales income arising from patent disposal, licence income and royalties arising from the grant of a licence or income received as compensation or damages for patent infringement.
Lastly, exploitation of a patented invention in house to boost revenue, such as a patented process or piece of equipment helping generate more income, could also be classified as IP income for the Patent Box.
Taking all these revenue streams into account, companies can save themselves tens or even hundreds of thousands of pounds every year. This money can then be reinvested to drive further growth and innovation, which is the whole intention of the Patent Box.
The financial gain through exploitation of the Patent Box should be factored in when valuing a company’s IP portfolio.
More than 5,600 patents a year were granted from 2012 to 2017, according to government figures while Patent Box claims over this period peaked at 1,160 in 2015 to 16, with a total value of £754.3 million. This means there are still thousands of eligible companies which have not claimed and are missing out on millions of pounds that could be driving future business development.
If a company has a patented product or process, an IP audit can investigate how much income they are generating in order to reduce the company`s potential tax liability. The same audit should take into consideration a company’s R&D activity to judge whether any innovation could be patented.
The accounting definition of R&D shares much with the legal rules around patenting. This means any company involved in developing new products, services or processes for commercial ends, is likely to have something capable of being patented.
Only a full IP audit will uncover whether opportunities are being missed. And only then will companies know whether they are fully capitalising on the Patent Box.