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Patent Box Consultation


24-10-2011 14:58:16 by Admin

 TO HM Treasury (17 October 2011)



Many thanks for your email of 22 Sep 2011 regarding the Code of Practice on consultation for the patent box as copied below.  It is my turn to apologise for not replying earlier but, as well as being away for some time, I have also been consulting with the committee of the SME Innovation Alliance (SMEIA) before responding.  

As you say, SMEIA was to receive a separate reply to our request to discover just how many individual SMEs were able to respond to this consultation.  We suspected, given the incredible complexity of this consultation, that the answer would be close to zero.  Indeed, the response to our FOI request now confirms that HM Treasury cannot provide details of any SME respondents which contradicts your claim that "comments have been received from smaller companies".  Perhaps you could clarify your claim?

We note your comments about three specific "SMEs".  Only one of these three seems to merit being labelled an SME involved in innovation itself.  In any event, we do not see how any of these individual companies relate to our complaint about the complexity of the written consultation?

The "open day" you refer to did not cross the radar of any SME we have asked. Again, we do not see how this one open day affects the basis of our complaint i.e. that the written consultation exercise was far too cumbersome and complex thus ensuring SMEs did not engage.  We appreciate this may not be deliberate but that is the result of turning a simple effective idea into one that does not correspond directly to incentivising patent licensing, which was the initial reason for the "patent box".

Turning to the main issue, we are confused by your suggestion that "We do not agree that it is unnecessary to provide information on the rules which specify how profits attributable to patents should be calculated."  Our issue, which you seem to have misunderstood, concerns the insertion by HM Treasury of a formulaic link between a patent and a product.  The evidence of current Court cases on patent licensing confirms our view which is that products and patent licensing are two entirely different things and Courts have insisted that any financial claim must be individually examined on its merits. Indeed, the financial claim of any patent infringement action is keenly fought by large corporations who contend that there can be no "formulaic approach" between a patent and a product sold in the marketplace.  We appreciate that UKIPO, HM Treasury, and other HMG officers do not get involved in any of these disputes, particularly when these are outside the UK which happens to be where the vast bulk of UK SMEs patents are of most value, and that these officers are therefore unable to provide any insight or even put up much of an argument against the weight of corporate lobbyists.  However, we are deeply concerned that your reply defends HM Treasury's position rather than looking again at how such a consultation seems to have evolved.  This is particularly troubling as the recent Hargreaves review insisted that future IP policy must be based upon "actual evidence". Our evidence exists so we believe that it is now up to HM Treasury to provide evidence to support their contrary position.  We look forward to receiving it, if any exists.

The Patent Box was supposed to reward just the licensing of patents by offering lower taxation on licensing dealings.  This would result in encouraging licensing thus going a long way to ensuring that the public has as much access as possible to patented technology.  It also has the effect of allowing licensing pricing to be reduced which a) reduces the need for patent litigation which is a major issue for SMEs with a really valuable patent which corporations infringe and b) would help under-developed countries.  The second point is a serious issue for DECC and was discussed with SMEIA and others prior to the Copenhagen summit, as they were concerned that patents are exploited by corporations using patent rights (i.e. "to exclude others") in order to maintain high pricing e.g. drugs.  HM Treasury's new proposal on artificially linking products encourages this higher pricing and exclusion of others which is the opposite of what was originally intended.  We, of course, are nor privy to HM Treasury current thinking as we are not involved in any ongoing discussions, despite our highly relevant membership.  This begs the question of why avoid a genuine dialogue with SMEIA?

We look forward to a response that deals with how HM Treasury has somehow moved its position and also as to why this consultation became so complicated that it did not attract the views of individual SMEs.  SMEIA responded but we remain unaware of a single other response from any organisation representing SMEs, despite an FOI request.  We cannot help notice that the general public are currently complaining en masse about the too cosy relationship between Government and large corporations while ignoring the majority which in this case happens to be, according to HMG data, innovative SMEs.  This consultation appears to be plainly yet another good example of this too cosy relationship.

Yours sincerely

John Mitchell
Chairman, SME Innovation Alliance


SMEIA's patent box consultation response


HMRC Reply 26 Oct 2011:

Mr Mitchell
Thank you for your further e mail of 17 October.
It is important for me to differentiate between your comments on the consultation process on the one hand, and on the Patent Box policy (the subject of the consultation) on the other. This distinction may, however, be less important to you and for convenience I have consulted colleagues in Treasury and HMRC so that I can provide a single response to all the points you raise.
Taking your further comments in turn. I stand by my observation that comments were received from smaller companies. I provided some evidence of this in my previous reply and I know that policy colleagues have met with smaller companies at a number of events – not all of which we will have details for however. Rest assured that a list of respondents will be published with the consultation response document in December.
Your comments about the complexity of the document are where consultation process considerations become harder to separate from policy ones. I’m not sure that I can usefully add much to my previous response that we consider the level of detail in the document was necessary and appropriate to the stage in policy development at which the consultation was taking place. I accept that we could at times do more to engage with individual SMEs, and would welcome any ideas on how we might generally do this more effectively than we do now.  In this case, the open day was announced on the HM Treasury website, and an e-mail was sent to all the people who had specifically asked to be on the Patent Box distribution list, also available through the website.
Finally your comments move even more into the policy realm and my Treasury colleagues have asked me to clarify that they have not moved their position. The aim of the Patent Box is to improve the competitiveness of the UK tax system for companies with patent income, in order to encourage UK companies to retain existing patents in the UK and develop new innovative patented products.  HM Treasury have never indicated that the Patent Box would only apply to licensing. Both the November 2010 and June 2011 consultations explicitly stated that profit embedded in products will also be included in order to achieve a broad regime which will apply to the widest possible range of businesses.  As I said above we remain of the view that the detail provided was, and still is, necessary to deliver an effective and broad regime and to enable stakeholders to make an informed response on how the regime should be implemented. The consultation sought the views of all interested parties.
I hope that this helps to clarify the position
Richard Bowyer
Consultation Coordinator

Cross-Government Business Agenda Team
Business Customer and Strategy


SMEIA reply 26 Oct 2011:


Dear Mr Bowyer
Thank you for your response.  I fear you have failed to answer the questions raised so we ask you (and your colleagues) again to please try again. 
They are as follows, all with respect to the Patent Box consultation:-
1.         We see no evidence of written submissions being received from actual SMEs.  HM Treasury's response to our FOI request confirmed this, yet you suggest otherwise.  Please clarify a) this discrepancy in responses to us and b) what information you claim to have specifically?
2.         The complexity was artificially created by HM Treasury moving from the position of a tax for royalty licensing discussed with myself and others in March 2009.  As we stated patent courts worldwide have evidence that does not agree with HM Treasury's revised position from the Mar 2009 discussions.  We want to know what actual "evidence" HM Treasury is relying upon, if any, to link product profits with individual patents?  As you say  "The aim of the Patent Box is to improve the competitiveness of the UK tax system for companies with patent income, in order to encourage UK companies to retain existing patents in the UK and develop new innovative patented products." Encouraging development is entirely different and separate from reducing corporation tax on existing product profits. 
3.         Given the apparent lack of evidence that HM Treasury has to support its formulaic linking of product profits to patents, we asked, but you did not answer; why did the consultation thus become so complex (making it largely impenetrable by SMEs in particular, as opposed to those equipped with larger resources)?  We appreciate your latest answer assumes that HM Treasury must be right.
Perhaps HM Treasury does not appreciate that Government procedures may be hugely different to that of an SME where costs have to be severely controlled.  SMEs do not have the monies or staff to sit around looking at Government web-sites such as that of HM Treasury.  Your remark that consultations are advertised on a Government Web-site and emailed to respondents (but not to the SMEs that attended provided the original idea at the Mar 2009 meeting) demonstrates a gulf that exists between truly getting the views of SMEs and HM Treasury's method that seems designed to avoid the views of SMEs.
4.         SMEIA aims to create British SMEs, to encourage those SMEs to innovate, to encourage exports and to reward those SMEs so that they can grow and employ more and more staff and thus benefit the UK economy.  HM Treasury seems to be at odds with us.  We would very much appreciate an attempt to explain why?
Yours sincerely
John Mitchell
Chairman - SME Innovation Alliance
PS Our 17 October 2011 email to you is now on our web-site.  Do you have any objections to us publishing your responses?


HMRC further response 27 Oct 2011:

Dear Mr Mitchell,
Thank you for your further e-mail
1.       The reply to your FOI request did not say that no SME’s had replied to the consultation. It said “It was not possible to identify from the responses received which businesses directly held patents or their exact size”. It also stated that the Government would publish a list of those who responded to the consultation on 6th December, and that the Government would therefore not be releasing further details until that time.
2.       As I said in my previous reply, the Government has not moved its position and has never stated that the Patent Box would apply only to royalties. The Government stated its preference for using a formulaic approach to calculate the profits from patents in its November 2010 consultation, in order to reduce administrative burden on both business and HMRC and to improve certainty for businesses using the regime. The majority of respondents supported this view.
3.       As I said in my previous reply, we remain of the view that the detail provided was, and still is, necessary to deliver an effective and broad regime and to enable stakeholders to make an informed response on how the regime should be implemented.
4.       HM Treasury is not “at odds” with SMEIA. We very much appreciate the time taken for SMEIA to respond to the Patent Box consultation and your response will be fully taken into account when preparing the Government’s response, as will all other responses received.
I consider that the Government has addressed all the questions you have answered and I am afraid that there is nothing further that I am able to say on this issue.
I have no objections to you publishing my response on your website.
Richard Bowyer
Cross-Government Business Agenda Team
Business Customer and Strategy


SMEIA reply 27 Oct 2011:

Dear Mr Bowyer

Many thanks for your prompt response and permission to publish.

We can see that you are swayed by the support of the "majority of respondents" to the Patent Box consultation.  Our concerns may have been allayed if you had been able to provide details of the make-up of those respondents as we strongly suspect that "the majority" will be once again those with sufficient resources to respond to a complex consultation i.e. large corporations, their professional lobbyists and other bodies that they largely control. The answers provided to us so far on this simple request seem to be somewhat evasive as well as delaying for reasons that remain unclear?

A majority of respondents who, in common have the resources to respond, cannot provide Government with the necessary balance of views on such a crucial issue.  Equally in patent courts, large corporates vehemently argue against a "formulaic" link between patents and products when they are accused of patent infringement which is why we remain keen to see any evidence that you have to support a formulaic link approach?  We are sure you would agree that it would be ridiculous to have tax relief available on one basis from the Government with courts using an entirely opposing basis in order for them to determine patent valuations? 

We appreciate the difficulty that Government has in obtaining the views of those with less resources which is partly why SMEIA was established as the views of innovative SMEs appear to be regularly ignored (such as happened recently with the Hargreaves review of IP).  This cannot be good for UK plc in the longer term at the very least. We would be keen on helping solve this issue and suggest that a meeting between us to discuss this should be arranged.  We look forward to hearing from you on this and on any other answers that you are prepared to provide.

Yours sincerely

John Mitchell
Chairman - SME Innovation Alliance