The Patent Box

Submission in September 2011

Contact: Barbara Arzymanow      


Close Date:

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.


A separate submission is being made in respect of the further consultation on R & D Tax Credits.



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.


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?

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.

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.

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


company from repeatedly focussing on one part of the cycle, especially the most innovative discovery phase.

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

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 profits

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 situation.

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 factor 25%

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 rules take?

No special rules required but see Question 3.

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 HMRC.

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 reasonable results.

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 residual profit.

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?

Probably not.

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?

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.

Yes to both questions.

Chapter 6: Commencement of the Patent Box

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 preferred.

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 appropriately motivated.

Question 24: The Government would welcome comments on the best forum for dealing with emerging issues once the Patent Box is introduced.

Probably ongoing consultation. The Patent Box is a major step forward and is bound to face teething problems.