The Advantages of the UK’s Patent Box for the Financial Services Industry
In April of this year the UK’s Patent Box legislation came into force. The Patent Box introduces a lower rate of corporation tax for companies who make profits from patented products and services.
The profits from the use of patented services and products will qualify for a lower corporation tax rate of 10%. Therefore, the Patent Box legislation has the potential to benefit many banks and financial services companies as they could gain patent protection for their back-office systems.
Nevertheless, relatively few banks and financial services companies have sought patent protection for their systems and they could consequently be missing out on a significant reduction in their tax liabilities. With huge budgets set aside to develop their IT systems, many companies have substantially invested in refining their back-office systems.
In order to benefit, companies within the financial services sector will need to identify which aspects of their back-office work can be patented. In the majority of cases it would be worthwhile for companies to apply for as many patents as possible.
Technical innovations that could be patentable include high-speed processing techniques, high-speed networks or other communications-related systems. In addition, large-scale data storage systems, encryption and other security aspects could also be patentable. A key question when deciding whether a system might be patentable is whether or not it could be applied to another field of technology.
Once a company has secured a patent they will then have a number of choices to make that could affect the amount of profits that will qualify for tax relief under the Patent Box. So as to optimise the financial benefit for the business, IT development and tax teams will need to work together.
Careful consideration will also have to be given to how the qualifying profits should be calculated. This is relatively simple in the case of patented products as the sale and manufacture of each product will qualify. However, this is more difficult and complex when it comes to patented services. Companies may choose to apply an accounting model for calculating the qualifying profits for patented services.
Patents can take between 18 and 36 months to obtain and so it is advisable to start planning and calculating as early as possible. In certain situations, patent applications can be fast-tracked and so companies may wish to take advice on whether this might financially worthwhile.
There have been concerns that the complexity of the aforementioned calculations could deter some companies from seeking tax relief. However, complexity is not a reason not to act and there are definitely some real benefits to be gained from the Patent Box.
The patent box is an elegantly design piece of legislation designed to ensure that genuinely innovative companies that bring new innovations to the country to the profit of their business and the benefit of society and the economy, can benefit by paying less tax on that profit made by selling the innovative product. It is not well adapted to the financial markets and there is little need for it to be so. Patent are best employed to protect innovation which requires investment to bring it to market. Business methods can often be implemented with very little investment. That might be why software and business methods are excluded from patentability (Nobody seems to be able to point to any underlying Historical policy for these exclusions).
If you are innovating then the patent box gives you an extra reason to patent those innovations. You cannot take advantage by filing patents on pretend innovations: remember that the invention must not have been made available to the public prior to filing the application. Inventions does mean new ones not pre-existing ones which some readers of this post might mistakenly think you are suggesting. If lawyers promote the patent.box as a tax dodge, genuine innovators will shy away from it and I’m already seeing that businesses that could use it are reluctant to do so because of the possibility of a social backlash and the perceived complexity. Your post does nothing to suggest that HMRC wil treat the modest claims of smaller businesses with sympathy, which I think they may well do following my own conversations with the HMRC, because they want them to grow and make even more profits in the future.