A new use for patents in the UK

Innovative

Most startups, in particular tech/web startups, are well advised to steer clear, and not waste their money on patenting things. At that stage, it’s fair to say that patents are completely useless.

Early companies don’t have the resources to prosecute patent infringers to extract licensing revenues, and they lack the resources to defend themselves if sued by someone who thinks they are infringing. In short, patents are a bit like the Mafia in Mario Puzo’s books: fascinating, brutally dangerous, and best kept away from.

Another reason that patents are frowned upon is simply that most startups absolutely hate the entire concept. As John Carmack put it:

The idea that I can be presented with a problem, set out to logically solve it with the tools at hand, and wind up with a program that could not be legally used because someone else followed the same logical steps some years ago and filed for a patent on it is horrifying.

Patent box changes that, somewhat (though it doesn’t fix the idealistic anti-patent argument). Here’s why.

A tangible, pacifist value to patents

The Patent Box legislation aims to reward companies that develop innovative products and book the revenues from these products in the UK. It does this by offering a large Corporation Tax discount on revenues linked to patented products.

This opens up a completely new use for patents, that don’t involve extracting licensing revenue, suing people, or getting sued: getting tax breaks.

This means that whether to file for a patent or not can become a fairly straightforward financial decision: am I likely to get more money back out via tax breaks than I put into the patenting process?

There are two sides to that equation: the cost of getting a patent, and the size of the likely tax break.

Size of the likely tax break

“How long is a piece of string?” comes to mind here, considering the Patent Box is not even in force yet and we don’t really know exactly how HMRC will implement it in practice. However, as a rule of thumb, it looks very likely that a small company that sells, say, just a single product, and that has a patent covering that product, will be able to get their corporation tax decreased by at least 5% (out of a 20% starting value), probably more.

This will be phased in over a period of several years, which further delays the benefit, but in any case, this is the first consideration: unless your company seems very likely to become profitable and start paying substantial amounts of Corporation Tax, don’t worry about patents yet.

The point where patents do become interesting to a startup is when they are about to generate proper revenues (with some certainty) and they start to think about whether there might be ways to reduce the tens of thousands of pounds levy that HMRC will take on those hard-earned profits.

At that point, the cost of filing a patent is more bearable, and the benefit is more tangible.

For companies that are already profitable, of course, this will be of more immediate interest.

The cost of getting a patent

If you ask how much a patent might cost, you get varying answers. A typical price that is often heard in startup circles about £10k.

That is indeed the price for filing what is known in the lingo as a “broad” patent. That’s the kind of patent that you’ll use to get licensing revenue or defend yourself in countersuits, and that’s the type of patents that most patent attorneys will try to get you if you let them.

If you want your patent to be an EU patent, it will probably be even more expensive, and take even longer (4 years or more is fairly common).

However, I found out from a chat with a Patent Solicitor recently that there is another way to file patents: he called those “narrow patents”.

Unlike their broader cousins, narrow patents focus on just one patentable aspect of the technology. Moreover, if you’re filing a patent for the Patent Box, you don’t need an EU patent – a UK patent can do for that purpose.

I’m told that such narrow patents, filed in the UK, can cost as little as £2k, and be granted within 2 years.

Cost vs benefit

£2k is not a whole lot of money for a company that’s generating revenues. £10k or more would give any SME pause for thought, but £2k is typically low enough to be worth a speculative shot.

On the upside, if the patent is granted and the Patent Box legislation comes through as expected, there should be many tens of thousands of pounds of upside for that £2k investment. This is definitely worth considering.

Conclusion

There’s no need to rush into filing a patent ahead of the Patent Box. For startups, certainly, a wait-and-see approach is sensible. For more mature companies, having a couple of chats with patent lawyers and maybe filing a cheap patent if it seems sensible is probably a worthwhile investment.

However, what is very likely is that at last, there will be some kind of use for patents that doesn’t involve suing people or extracting licensing revenues. That means there’ll probably be a lot more patents being filed in the future.

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