There's no hiding from the fact that companies with a reputation for innovation, such as Apple or Dyson, enjoy a higher valuation and healthier profit margins than might otherwise be expected.  Investors are attracted not only by current income but also by the expectation of an evolving product range that consistently beats its competitors to the market.  Meanwhile consumers happily buy into a brand that is seen to deliver a unique experience.  But trying to define the intangible assets behind a company's value is not straightforward.  As the UK Government introduces tax relief schemes for the technical and creative industries starting from April 2013, now is the time for advisors in the financial world to get to gips with intellectual property.

Intro

Intellectual property (IP) is an umbrella term for a wide spectrum of legal rights arising from research activities, product development and creative processes.  As the name suggests, IP is a form of property and the rights that it bestows on an owner can therefore be sold, licensed, mortgaged or otherwise change hands for monetary value.  For example, J K Rowling has sold IP assets in the Harry Potters films to Warner Brothers while in the last year an Apple-led consortium purchased a 6,000-strong patent portfolio from bankrupt Nortel Networks for $4.5bn.  Any business that has intellectual input to its activities is going to be generating one form of IP or another.

Copyright

In the creative industries, one of the main IP assets is copyright in any original work that is literary, dramatic, musical or artistic, including sound recordings, films or broadcasts, and also covering entities that combine a mixture of these such as websites and computer games.  The roots of copyright are that it is a moral right which arises automatically, and free of charge, for any new creation.  As an asset it has the appeal of longevity, lasting for 70 years after death of the creator (or 50 years from creation for recordings, broadcasts or computer-generated works).  However copyright is relatively narrow in the exclusivity that it provides; infringement requires proof of actual copying of a substantial part of a protected work.  Copyright can be a valuable commercial asset but its strength may rely on how unique the creator has been in a particular field.  Often copyright is one asset amongst other forms of IP.

Registered rights

IP rights arising from registration, in particular patents, trade marks or design registrations, have always been seen more as economic assets rather than moral rights.  These assets must be paid for but they can potentially provide broad exclusivity, covering not only direct copying but also similar creations, and even to the detriment of innocent infringers.

Trade marks

Trade marks are an important asset for a company's brand value.  A trade mark can be registered for a name or logo, or even a unique shape, colour or sound linked to a particular trader.  They are long-term assets, initially lasting for 10 years in the UK but indefinitely renewable every 10 years thereafter (as long as they are still in use).  A trade mark registration gives its owner the exclusive right to use the mark in relation to specified classes of goods or services.  In general, a trade mark registration is infringed by the unauthorised use of an identical or similar mark in relation to goods or services which are identical or similar to those for which the mark is registered.

Designs

Companies that sell products which rely on their looks can count design rights and design registrations amongst their IP assets.  An artistic work such as a textile pattern may benefit from copyright and also be registered as a design.  Products that are designed for utility as well as appearances, for example a toothbrush having a unique shape, may be protected by design registration.  The design of packaging such as stylised containers is often registered.  Design registrations initially last for 5 years and can be renewed every 5 years up to a maximum term of 25 years.  Short-lived products might rely on unregistered design rights (lasting for up to 10 years in the UK) for protection without the cost of registration.

Patents

Patents are key assets for most technology businesses.  A patent is a form of IP that provides protection for anything that is innovative in the way that it works.  This can range from a novel pharmaceutical compound to an improved design for a wind turbine, or from a unique manufacturing method for turbine blades to a new approach to medical imaging software.  Patents convert these technical advances into tangible commercial assets that can last for up to 20 years.  A patent grants its owner (and any licensee) with exclusive rights to use the technology - making them important tools to close off the market to competitors and an opportunity to recoup the costs of research and development.  However, such a strong monopoly comes at a price and it might cost £5,000-6,000 to obtain a granted UK patent with professional help.  To extend patent protection to several territories the cost will soon multiple into the £10,000s.

Value of IP assets

IP assets such as copyright, trade marks and patents all add value to a company and help it to flourish: attracting investment and fuelling expansion.  Many companies will have an interlinked portfolio of these assets covering different aspects of their business.  The UK Government has recognised that innovative and creative businesses make an important contribution to the economy and has recently announced some new tax relief schemes to keep these activities rooted in UK companies.

Tax relief schemes

Patent Box

The Patent Box has already been enacted in the Finance Bill 2012 and will enter into force on 1 April 2013.  Under this scheme UK companies can apply for a reduced rate of corporation tax, down to 10%, for profits attributed to patents.  The full benefit of the regime will be phased in over the next four years, starting at 60% and reaching 100% from 1 April 20171.  The Patent Box is far-reaching in its scope, enabling a company to count worldwide profits for anything that is linked to a UK patent.  The main catch is that the patent owner (or an exclusive licensee) must also contribute to the development or commercialisation of the patented technology.  Profits from exploiting an off-the-shelf technology are therefore excluded.  However any company that is already active in developing innovations is expected to qualify.

Creative industries

The Government also announced in its 2012 Budget that it will introduce corporation tax reliefs for the video games, animation and high-end television industries from April 2013.  The proposed creative sectors tax relief is currently under consultation2 but is expected to use a similar model to the existing Film Tax Relief - where a payable cash rebate of up to 20% or 25% of core film production expenditure3 can be claimed.  As for the Patent Box, claims for these creative sector tax reliefs will need to be included in a company’s tax return for a given accounting period.

Video games development

The computer games industry4 will welcome the new tax relief schemes.  Software developers find themselves in an IP grey area where it is often felt that legislation has yet to catch up with virtual reality.  Computer games are protected by copyright from different angles.  There is copyright in the underlying software code, although that can't stop another developer from writing their own code with the same end result.  Copyright also subsists in the graphical and musical elements of the games, but these are often derivative e.g. for games linked to movies so the protection can be relatively weak.  Software-based developments can be protected by patents if they provide a real technical improvement, for example to display quality or processing speed.  However patents often take too long to be granted in such a fast-moving industry.  The Patent Box scheme could provide a new incentive for UK games developers to apply for patent protection for their longer life products, while also taking advantage of creative tax relief for the development work involved.

Interaction with existing R&D tax relief

The Patent Box is designed to run alongside the existing R&D tax relief scheme. For early stage work, UK companies can claim a tax credit as a deduction based on R&D spending.  Once development has resulted in profit-making activities then the company can elect into the Patent Box.  In relation to the proposed creative industries tax relief, companies will not be able to claim relief twice on the same research and development costs. Companies will need guidance in deciding whether to claim R&D tax relief or a creative sector tax relief in any given tax return.  This could see development work being streamed into 'technical' and 'creative' aspects.  This could help with identifying the technical aspects that have a potential for patent protection, and hence Patent Box tax relief once a product has been launched, while the creative aspects are protected by other forms of IP.

Awareness of IP assets

UK companies wishing to take advantage of the new tax reliefs available from April 2013 will feel the burden of identifying their creative activities, understanding the different types of IP assets that they already own or could register, and calculating the proportion of their profits relevant to Patent Box.  It is advisable to actively review a company's development work with a patent attorney so as to recognise where patents could be applied for, as well as matching up an existing patent portfolio with revenue streams.  Accountants and finance directors may need to boost their awareness of a company's IP assets so as to appreciate which of these are relevant to underlying value and which may be exploited to leverage a reduction in corporation tax.