The graphene industry – perfectly placed for the Patent Box?

January 2013 | EXPERT BRIEFING | INTELLECTUAL PROPERTY

financierworldwide.com

The present UK coalition government has the unenviable task of reducing the UK’s fiscal deficit and at the same time bringing the economy back to a period of sustained growth. Taxation is of course one route to increasing revenue for the government, but striking the right balance between increasing tax receipts and the protection of consumer spending and private sector investment is not an easy task. However, the introduction of the Patent Box in April 2013 might just achieve all of these aims nicely.

The Patent Box is a tax incentive for intellectual property rights to be held by UK companies. More specifically, profits that are generated from an invention that is protected by a ‘qualifying patent’ will be subject to a 10 percent reduction in corporation tax. In this regard, although the Patent Box is a UK initiative, the patent that is used need not be a GB patent; it is possible to use a European patent, or some other patent granted by a patent office having ‘acceptable’ standards of examination. However, for those companies that do not routinely pursue patent protection, using a GB patent is likely to be the most cost effective route. It is also important to note that the Patent Box can include revenue from sales and licensing, both in the UK and overseas.

Although at first sight this tax reduction seems unlikely to meet the aim of increasing tax receipts, the thinking behind the scheme is that intellectual property owning companies that were previously located overseas will consider the UK as a place to relocate in order to benefit from the reduced rate of corporation tax. Essentially, the UK coalition is hoping for a smaller slice of a larger pie.

However, there is also the potential for the Patent Box to actually stimulate innovation (or at least patent filings) as companies will look to ensure that their highly profitable products are protected in some form by a qualifying patent.

The Patent Box could therefore actually result in lower corporation tax for innovative businesses, greater overall tax receipts for the government, and potential investment growth in the UK’s innovation sector. How likely is this? It is of course too early to say, but there is one sector in the UK that may benefit significantly from this new legislation: the graphene industry.

Like graphite and diamond, graphene is a form of carbon – a one-atom thick single sheet of carbon atoms arranged in a honey-comb structure, to be precise. It has many desirable properties such as high strength, high electrical conductivity and, of course, it is extremely thin. It has a wide range of potential uses, including electronics, flexible touch screens, sensors and in composite materials.

However, the potential offered by graphene has yet to be realised in terms of concrete products and thus, in terms of relevance to the Patent Box, profitability. Indeed, actual commercialisation of graphene has not been so straightforward and the UK government has even outlined plans for a national institute of graphene research and commercialisation to ensure that the UK builds on its expertise in the area and does not get left behind. The University of Manchester is already acknowledged as a leader in graphene research, being the academic home of Professor Sir Andre Geim and Professor Sir Kostya Novoselov, who received the Nobel Prize in Physics in 2010 for demonstrating the remarkable properties of graphene.

This lack of concrete commercialisation may actual help UK companies benefit from the tax relief provided by the Patent Box. This is because many existing profitable companies rely on successful products that have been on the market for many years and so if not already the subject of patent protection, will not be able to gain patent protection because the ‘invention’ is no longer new.

Contrast this with the position for graphene where actual consumer products are yet to be fully developed and thus can still possibly be the subject of patent protection. Given that the Patent Box can also include profits derived from products that incorporate a patented invention and in view of graphene’s potential for application in an extremely diverse number of industries, it seems that as a technology sector it is perfectly placed for making the most of the Patent Box.

Despite this great potential, obtaining patent protection in an emerging technology, such as graphene, requires a measured and balanced approach. Filing a patent application before the invention has been fully developed and defined can lead to problems both before the various patent offices and also after grant of the patent if it is challenged by an opponent or potential infringer. Similarly, potential investors want to be sure that they are receiving something tangible in return for their investment and so a credible patent portfolio is often viewed as a must and so delaying filing patent applications can harm the ability to gain investment.

Whilst the Patent Box cannot do anything to reduce the initial costs of a patent application, it can potentially reduce the overall tax burden of the company, which frees up more cash for further research and development, as well as new patent filings. In this regard, many start-up companies operate a two-stream approach: on the one hand they invest and concentrate on core research and development with a long term objective in mind, and on the other they may produce and sell starting materials, intermediates or research tools in order to provide a revenue stream. With the correct company structure in place and provided the products are protected in some way by a qualifying patent, this revenue stream can potentially benefit from the reduced tax of the Patent Box.

It is therefore hoped that the Patent Box will be something of a silver bullet to the UK’s innovation sector, both by stimulating research and by incentivising companies to locate in the UK. Not all companies will find it easy to make the most of the Patent Box. For others, however, such as those in emerging fields like graphene commercialisation, they may be coming to the table at just the right time.

Connor McConchie is a partner at D Young & Co LLP. He can be contacted on +44 (0)23 8071 9500 or by email: cfc@dyoung.co.uk.

Connor McConchie

D Young & Co LLP