Many tech businesses have sufficient capital to develop their technology but not enough to really commercialise it at scale. For such companies licensing their technology to larger players often represents the best way to maximise shareholder value in an acceptable time frame.
However even for companies with very promising technology, finding suitable licensees and getting them interested in taking a licence often proves very difficult in practice.
Such reticence on the part of would be licensees is not difficult to understand. One does not have to be quite as pessimistic as former French president Pompidou to appreciate the problem: commercialising new technology is almost always a risky business.
Cutting edge can quickly become bleeding edge as being the first to solve numerous technical and commercial problems takes its toll. Almost everyone, almost always underestimates the true costs of getting to market with a new product or process: budgeted capex and other expenditure is often an extremely poor proxy for the real costs. And then there are the unknown unknowns: for example, what are competitors up to and how will they react to the new technology hitting the market.
Not surprisingly, would be licensees need a compelling business case to make taking such risks worthwhile. This leads to a further barrier to licensing: licence fees. Many licensors will typically be looking at a royalty rate that equates to a quarter to a third of the licensee’s net profits. Such a drag on licensor return can be a further huge disincentive to take a licence.
This is where patent box comes.
What is Patent Box?
Patent Box is a statutory regime, introduced by the Finance Act 2012, which inserted a new Chapter 3 into Part 8A of the Corporation Taxes Act 2010. It enables qualifying companies to apply an extra deduction to their relevant IP income – basically the income that comes from the exploitation of patented technology – so as achieve an effective rate of corporation tax on that income of 10%, which is considerably lower than the main UK rate of 25%. The benefit of patent box is not limited to companies currently making a profit from their exploitation of patented technology: companies making a loss on qualifying activities can carry that loss forwards and use it offset against future relevant IP profits. Patent box can also confer a substantial benefit on an exit, where the value of the tech company, will often be calculated as a multiple of EBITDA.
Why is Patent Box Relevant to IP Licensing?
Patent Box is relevant to IP licensing because it can be enjoyed by both the licensor of UK (and certain other) patents in relation to the licence fees it earns from licensing such patents and also by an exclusive licensee in relation to its sales income of licensed products[1].
The effect of this from the licensee’s point of view is that the reduced rate of corporation tax it pays on its sales of patented products can materially ameliorate the effect of having to pay licence fees. In short it can make a licensing deal stack up from a risk reward perspective.
Only Exclusive Licensees Qualify
To get the benefit of patent box, a licence must do two things[2]:-
(i) Firstly, it must confer on the licensee a right to work the patent to the exclusion of all other persons (including the patent owner) in at least one field of use covered by the licence. So for example granting an exclusive licence of a patent for a new type of gearbox to a licensee for use in agricultural vehicles will satisfy this condition. However a sole licence (an arrangement where the licensor and only one licensee can work the invention) will not qualify the sole licensee for patent box relief.
(ii) Secondly, the licence must give the licensee the right either to bring infringement proceedings against a third party without any further consent of the patent owner (or any other person) being required or the right to receive the whole, or the greater part, of any damages awarded for any such infringement.
Whilst many IP licences will satisfy the first condition many won’t satisfy the second condition as it is common for patent owners to specify in licence agreement that (a) they alone can bring infringement proceedings or at least determine if the licensee can bring them and (b) that they should retain any damages recovered from an infringer.
The Development Condition
A further important condition that a company has to satisfy to qualify for patent box relief is the development condition: in essence the company or a group company must have carried out significant development work in relation to the invention the subject of the patent or in relation to a product or process incorporating such invention. A licensee should be able to show that it hasn’t just taken a licence of a fully developed product but has significantly contributed to the development of the product itself. Such development work should be documented. The licence granted to the licensee should grant the licensee the right to carry out research and product development of the licensed IP.
Using Patent Box to get a Licensing Deal Over the Line
Would be patent licensors should build an analysis of the effect of patent box relief into their marketing materials, modelling the effect of the relief on the licensee’s after tax returns from taking an exclusive licence. They should also ensure that any licences granted qualify the licensee for patent box relief and that they will not block future more significant licensees from getting the benefit of the relief going forwards, for example because the effect of earlier licences is to preclude the granting of future exclusive rights.
What Sonder & Clay can do for you?
Sonder & Clay’s accomplished IP Solicitors can help both licensors and licensees put together licensing deals that will qualify both parties for patent box relief. Our team’s decades of experience will help you devise a licensing or exploitation strategy to deliver a return on your research and development investment. Please get in touch to book a consultation.
[1] See section 357BH of the CTA 2010.
[2] See section 357BA of the CTA 2010.
