lunar islamist: Don't miss out on the patent opportunity

Is your financial services firm overlooking a potentially lucrative form of tax relief?

Banks and other financial services companies could be overlooking a potentially lucrative form of tax relief by failing to get patent protection for their back office systems, according to Withers & Rogers.

When the Patent Box legislation takes effect in April next year, it is not just the profits from patented products that will qualify to be taxed at the lower corporation tax rate of 10%, it will be the profits from the use of patented services too.

Despite this, it appears relatively few financial services companies have considered seeking patent protection for their systems and they could miss out on a significant reduction in their tax liability as a result.

Nick Wallin, partner and patent attorney at Withers & Rogers, said:

?With significant budgets set aside to develop their IT, many banks and financial services companies have invested heavily in refining their back office systems over many years. However, remarkably few have opted to seek patent protection for their work to date, preferring to keep them secret instead.

?The introduction of the Patent Box next year could be about to change this, as profits from patentable services will qualify for tax relief for the first time.?

To benefit from the Patent Box, companies in the financial services sector will need to start by identifying which technical aspects of their back office systems are patentable and in most cases it would be worthwhile seeking as many patents as possible.? The types of technical improvements that are most likely to be patentable include such things as high speed processing techniques, high speed network or other communications-related systems, large scale data storage systems, encryption and other security aspects, to name a few.

In general, a good rule of thumb as to whether a technical invention might be patentable or not is to consider whether it might be applied in another field of technology. Clearly, all of the above examples could potentially find some use in another area. On the other hand, business specific ideas such as trading models and systems used for calculating derivatives, are unlikely to be patentable because they are regarded as ?business methods? and are likely to be excluded from patent protection under UK patent law.

Once the patents are secured, the company has a number of choices to make which could affect the amount of profits that qualify for the tax relief. In order to optimise the financial benefit for the business, it will be necessary for the IT development and tax teams to work closely together, drawing in specialist support from their professional advisers as appropriate.

In particular, careful consideration should be given to how the qualifying profits are calculated. In the case of patented products, this is relatively simple because all the profits generated from the manufacture and sale of each product will qualify. For patented systems or methods, the calculation is necessarily more complicated and can be undertaken in a number of ways.

Firstly, it is necessary to determine how much profit can be considered to be within the ?box? - as qualifying profit - to which the lower rate of corporation tax applies. In the case of profits generated from the use of patented systems, such as back end data systems, a notional arm?s-length royalty is set for use of the system, and the value generated by this can then be considered as qualifying profit for patent box purposes. The issue then becomes one of calculation of the amount of this arm?s-length royalty.

One of the most popular ways to calculate such a notional royalty is to regard it as a ?fixed licence fee?. Using this model, the company?s accountant would need to quantify the notional amount that the company would be expected to pay if it was paying a fixed arm?s-length licence fee to a third party organisation for use of the patented service.?

This cost could then be added to the qualifying profits, so enhancing the tax relief available to the company.

?If one considers how much software and system licence fees already cost then it would not be unusual for this ?fixed licence fee? model to add potentially several hundreds of thousands of pounds per patented service to the qualifying profit pot. It is therefore easy to appreciate the extent of the financial benefit at stake,? added Nick Wallin.

Alternatively, companies may choose to apply an accounting model for calculating the qualifying profits based on a percentage of the profits generated. For example, for accounting purposes, it could be assumed that the company has agreed to pay 5% of the profits generated by use of the patented system in royalties per patent. While 5% may sound a relatively small proportion of the profits generated, it is usually possible to secure more than one patent for each system and therefore the qualifying profit pot can quickly mount up.

Nick Wallin explained:

?For example, assuming we have an automated back end trading system using high frequency trading and generating profits in the ?100 millions. The trading system uses a proprietary grid processing architecture that is patented, and stores data in a proprietary fast-to-access system that is also patented (hence at least two patents cover the system).

?Using this model, the more patents you have, the more tax you can save, as the arm?s-length, per-use-based royalties per patent can stack one on top of the other. It is as though you are saying that you have to license each patent that covers the system separately, for a reasonable royalty. Given that reasonable patent royalties can easily be 5%, with say 10 patents covering different aspects of the system, then 50% of the profit generated by the whole system would represent qualifying profit for patent box purposes.??

However, patents can take about 18-36 months to secure, so it is worth starting early so you can start benefiting from the reduced tax liability as soon as possible.? In some cases, patent applications can be fast-tracked too, so you may want to take advice on whether this would be financially beneficial.?

A recent survey of accountants conducted by Withers & Rogers has revealed that almost half (43%) believe that a significant number of businesses are yet to make any preparation for the Patent Box legislation and may not be ready to take advantage of the reduced tax rate. They were also concerned that the complexity of the calculations could deter some from seeking the tax relief.
Nick Wallin concluded:

?Complexity is no reason not to act. By encouraging IT and accounting teams to work more closely together and plan ahead for the new legislation, financial services companies stand to gain.

?As well as seeking patent protection now, they should ask their accountants to start to track their patented and non-patented profits separately from the beginning of April 2013.?

Source: http://www.dofonline.co.uk/index.php?option=com_content&task=view&id=6642&Itemid=130

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