TO HM TREASURY FURTHER CONSULTATION ON PATENT BOX
Date: 2 September 2011
This submission has been prepared by True Research Limited, a healthcare
consultancy firm which mainly advises institutional investors (e.g. pension
funds) and biotechnology companies. True Research Limited and its directors
have considerable experience in raising finance for biotechnology companies and
in analysing what makes pharmaceutical businesses of all sizes and geographical
origins successful. The firm is independent of lobbies associated with large NHS
suppliers (e.g. big pharmaceutical companies), the medical professions, patient
charities and NHS managers. The main person who has worked on this submission
within True Research Limited is Barbara Arzymanow. The main motivation of True
Research Limited and Barbara Arzymanow in submitting this document has been to
make use of our specialist skills in giving our thoughts on recent proposals on
the Patent Box.
GIVES OUR ANSWERS TO ALL QUESTIONS ASKED IN CONNECTION WITH THE FURTHER
CONSULTATION ON THE PATENT BOX.
submission is being made in respect of the further consultation on R & D
ANSWERS TO SPECIFIC PATENT
In this document consultation questions raised in HM
Treasury’s further consultation on the Patent Box appear in red. The chapter
titles in green are as in the appropriate Treasury document. Our responses to
the questions are in black and/or blue. We have chosen blue for those of our
comments to which we would particularly like to draw attention.
THE PATENT BOX
Chapter 2: Qualifying patents
Question 1: Will the requirement for a
patent granted by the IPO or EPO cause significant commercial distortion? Do
you believe that patents granted by any other EU national patent offices should
be included, and if so which jurisdictions?
The proposals will not lead to significant
commercial distortion and no other EU patent offices need to be added.
Question 2: Do the ownership criteria
adequately permit on-licensed patents and patents developed or commercialised
in commercial cost sharing, partnership and joint venture arrangements to
qualify for the Patent Box?
Question 3: Do businesses think that the
development criteria are workable or are there commercial situations which
should be included but would fall outside these rules?
Clause 2.13 (requiring a company to remain
actively involved in the ongoing decision making connected with the
exploitation of the patent) will nullify the benefits of the patent box for numerous
highly innovative, future start-up companies. Those affected will include many
biotechnology companies aiming to discover important new medicines.
Such companies often lack the expertise, financial resources and global
presence to obtain regulatory approval for drugs and market them. Instead they
focus on the most innovative part of R&D, the discovery phase. They obtain
patents and then license drugs to major drug companies that may wish to take
over all-decision making. The originating small biotechnology company’s main
reward is usually a profit share, often in the form of a royalty on sales.
Successful biotechnology companies, which
are at present largely confined to the US but which are badly needed in the
rest of the world, invest much of their profit share or royalty stream in basic
research aimed at discovering further drugs.
There is no benefit in requiring the
originating company to take part in decisions that could be taken better by a
large company. The effect would simply be to interfere with normal commercial
behaviour. Small, innovative companies could apparently benefit from the patent
box if they sold their patent rights for a lump sum whilst they were still
involved with decisions over the patent but, tax apart, such a deal would be
much less attractive.
Clause 2.13 could have the effect of
stifling just the type of high-tech start-up that we should be trying most to
encourage. These companies will often be loss-making and therefore unable to
benefit from the patent box before they license products out and may not
benefit afterwards because of a lack of ongoing involvement in decisions
We strongly recommend a change so that a
company that has made a discovery leading to a patent can benefit from the
patent box whether it retains a decision-making role or not, if the company is
putting a major effort into trying to make further patentable discoveries. We
agree that to benefit from the patent box a company should be actively involved
in the patent development cycle. However, we do not wish to exclude a
company from repeatedly focussing on one part of the
cycle, especially the most innovative discovery phase.
Chapter 3: Qualifying income
Question 4: Do businesses believe that it is
necessary to set out rules to more closely define the circumstances where a
composite tangible or intangible product should be considered a single
functionally interdependent item? Or can this requirement be tested through a
motive test on a case-by-case basis?
A motive test on a case-by-case basis is
likely to give the best results. A rigid definition of circumstances would
increase certainty but this benefit would be more than offset by some of the
bizarre consequences of any definition that we can bring to mind. A
case-by-case approach would also reduce the scope for tax avoidance.
Question 5: The Government would welcome
views on how the arm’s length profit attributable to patents used in processes
or to provide services should be calculated.
No good universal method exists. If
production of the product or provision of the service is impossible without
relying on the patent, then the same methodology can be used as for a product
patent. In other circumstances the benefit will generally be cost saving or a
superior outcome (e.g. a purer product). Estimates of the value of these
benefits will have to be made but in many cases they cannot be precise (e.g.
because a company may not know precisely what the costs would be for a
production process that it does not use).
Question 6: Do businesses think that the
proposed claim of retrospective benefits for the period while a patent is
pending is fair and workable?
Chapter 4: Calculation of Patent Box
Question 7: Do businesses agree that the
proposed model will produce an acceptable result in most circumstances, given
the flexibility provided by the ability to apply the model to company divisions
separately if required?
Yes for Step one and Step two.
No for Step three.
The amount of money spent on developing
a piece of IP is in no way a proxy for its value. A company should increase
marketing until extra marketing expenditure stops helping post-marketing
profit. Quite a large increase in marketing spend may lead to only a little
extra net profit but nevertheless be worthwhile. R&D is quite different.
Some of the greatest scientists in history have made very great discoveries
with very little money. Dedication and inspiration can be more important than
expensive equipment and R&D budgets.
A typical large pharmaceutical company
spends twice as much on educating doctors (marketing) as on R&D but its
brands are certainly much less valuable than its patents, as illustrated by
what happens on patent expiry.
One simple solution might be to have a
number of proportions of residual profit allocated to patents on the basis of
simple guidelines e.g. according to which of the following best describes the
All due to patents 100%
Mainly due to patents 75%
Debatable whether patents or other IP more important 50%
Some other form of IP more important but patents still an important
Patents relevant but other IP far more important 10%
Question 8: Is there any alternative basis
of apportioning residual profits between different products which is more
appropriate without introducing excessive complexity?
As per Question 7.
Question 9: Should there be special rules
for any one-off items of income or expenditure? If so what form should the
No special rules required but see Question
Question 10: Is divisionalisation the most
effective and least burdensome way to deal with a wide range of situations in
which pro-rata allocation of profits and expenses would produce an
inappropriate result? Are the conditions set out above to govern the use of
divisionalisation appropriate? The Government would welcome any alternative suggestions,
and would appreciate sufficient detail that these can be evaluated by HMT and
The proposals are satisfactory. A better
option may exist but we have not come up with one.
Question 11: Are there any other
circumstances in which divisionalisation should be mandatory?
None obvious to us.
Question 12: The Government would welcome
views and evidence on the appropriateness of step 2 in identifying residual
profits, as well as on how outsourced functions should be defined and whether
there are any other costs which should be excluded from the mark-up.
Step Two is satisfactory.
Outsourced functions are activities that
could be carried out in-house but are not for reasons of expertise, experience,
speed, reliability, workload or cost.
The exclusions are sufficient to give
Question 13: The Government would welcome
business’ views on an appropriate formula to allocate residual profit to
patents, and on what types of expenses should be taken into account in
calculating the relative contribution made by the patent and brand to the
See Question 7.
Question 14: Can businesses suggest any
alternative ways of effectively separating patent profits from those arising
from other types of IP? If a relative contribution approach is chosen, is the
proposed safe harbour set at an appropriate level to simplify smaller claims?
See Question 7.
If our proposals were adopted, a safe
harbour would probably not be needed.
Question 15: Are the proposed rules for the
carry-forward of Patent Box losses appropriate? Should Patent Box losses also
have to be set against Patent Box profits of other group companies in the same
accounting period, in order to achieve a symmetrical treatment of Patent Box
profits and losses?
Yes to both questions.
Question 16: Do businesses consider that
taking pre-commercialisation expenses into account in these circumstances is
proportionate and fair, or are there better ways of ensuring that the benefit
accrues to total net patent profits?
Yes, it is fair and proportionate.
Chapter 5: Computational issues
Question 17: Do respondents see any
practical or technical problems with the approach of implementing the 10%
Patent Box rate through a computational tax deduction?
Question 18: Do respondents have any initial
comments about interaction with double tax relief rules or have any views on
the Government’s stated aims for giving relief?
No but the matter does need exploring.
Question 19: Would having to comply with
transfer pricing rules for transactions with associated companies in cases of
tax avoidance be an unreasonable burden for smaller companies?
Question 20: Can respondents suggest any
alternative ways to prevent artificial tax avoidance abuse of the Patent Box?
Only as per replies to other questions.
Question 21: Do respondents consider that
other aspects of the formula apart from divisionalisation and step 3 will give
rise to clearance applications? Will the current nonstatutory clearance system
be sufficient to respond to the range of enquiries that the Patent Box is
likely to generate?
Yes to both questions. Many aspects will require interpretation,
especially over whether a specific patent covers a particular product. There is
often debate over how broadly a patent should be interpreted.
Chapter 6: Commencement of the Patent
Question 22: The replacement of a cut-off
date with a phase-in approach will have different effects for each company. The
Government would welcome comments on the impact of this proposal on different
sectors as well as views on whether businesses prefer a cut-off date as
originally announced or would favour the proposed phase-in approach.
The proposed phase-in approach is
Chapter 7: Tax impact assessment
Question 23: The Government would welcome
comments or evidence to support the assessment of the impacts of the regime.
We strongly support the scheme, subject to
good drafting and the points made in this submission. However, we cannot
produce more reliable estimates of the impact than HM Treasury has already
done. The benefit is greater than the tax saving alone might suggest. The
R&D Tax Credits and the Patent Box together make the point that HM Treasury
understands the importance of research. The Department of Health must also be
seen to support research in the NHS and industry and academia must be
Question 24: The Government would welcome
comments on the best forum for dealing with emerging issues once the Patent Box
Probably ongoing consultation. The Patent
Box is a major step forward and is bound to face teething problems.