Tax break for patents a vital step in stimulus

DES SPEED may only be dreaming about profits at the moment. But that is not to say he is not banking on them in the future.

Speed after all has in the past had something of a love affair with profits as his previous investors can testify.

He is currently the chief executive of one of the North’s most exciting university spin-outs, PathXL. But Speed is probably best know for his role in creating one of Northern Ireland’s major software successes, Lagan Technologies – or, as it is now known, Kana Software.

Before that he was a founding director of Sx3 – which was a business-processing outsourcing subsidiary of the Viridian Group.

When Speed joined Lagan in 1999 it had just 10 employees and an uncertain future. By 2010, he had grown its workforce to more than 160 people and annual revenues close to £20 million.

Lagan became a global leader in developing G2C (government to citizen) technology and provided services to more than 200 state and local government agencies across the globe, from Toronto to East Timor.

Its growing success inevitably attracted suitors and two years ago it was acquired by California-based group Kana Software in a deal estimated to be worth more than £29 million.

Shortly after the deal, Speed left Kana and took some time out to play mentor and adviser to local companies.

But last year he got the opportunity to, as he describes, “jump back into the coalface” and he took up the role of chief executive with PathXL.

The Queen’s University spin-out is developing pioneering digital pathology technology.

It is currently the only commercial UK company in its field and Speed has big ambitions for it – not least because of its strong relationships with Queen’s University, the Centre for Cancer Research in Belfast and the Belfast Hospitals Trust.

“PathXL’s research is groundbreaking and its software is already award-winning – I believe that our innovative virtual microscopy and digital pathology solutions are world class,” he says.

“There is, of course, a strong commercial model to this business but there is also a very strong commitment to working with Northern Ireland’s research community and the rest of the global community to help develop new cancer therapies. PathXL is about making a difference,” adds Speed.

He is currently on the fund-raising trail, talking to potential investors from Belfast to Dublin and London.

Speed believes raising money in 2012 is much more difficult than it was when he was doing the rounds a decade ago with Lagan Technologies.

“Once you go beyond the seed funding stage, it gets a lot more difficult in Northern Ireland. We’re lucky because we have an established commercial model – we have around 45 clients on board and we are already operating in Europe and the US – but we are ambitious about what we want to do and what we want to achieve in the future,” he says.

That future obviously includes the prospect of profits which is why Speed and entrepreneurs like him in the North are enthusiastically backing a new UK tax incentive which is coming into force next April.

The patent box regime will lower the rate of corporation tax applied to patents and some other forms of intellectual property.

What it means is that, from next April, the patent box tax regime will tax profits associated with qualifying patents at a rate of 10 per cent.

According to Ian Coulter, the chairman of the Confederation of British Industry in Northern Ireland, the introduction of the patent box regime offers a “real opportunity” for the North.

“I believe it could become a key pillar for Northern Ireland to build around to become a global centre of excellence.

“We need to make the most of it, and we need to start now,” he urges.

Coulter, who is the managing partner of Tughans, one of the North’s largest commercial law firms, says there are five key aspects to the patent box that Northern Ireland companies should bear in mind:

1. All qualifying patents will benefit from the 10 per cent corporation tax rate.

2. Qualifying profits will be calculated by reference to qualifying product sales and will also include royalty income for use of qualifying patents.

3. Any company which holds interests in qualifying patents can apply to the scheme also.

4. Eligibility is not linked to claiming RD tax credits in Northern Ireland – and it will not affect any RD incentives; and

5. The regime is not available in the Republic of Ireland.

Mark Ennis, the chairman of the North’s business development agency, recently let slip that at least two companies who were earmarked to locate in the Republic have changed their minds and are planning to invest in Northern Ireland because of the new patent box regime.

While Coulter is enthusiastic about the potential that the patent box can deliver in the North, he does not for a minute believe that it can be seen as a “replacement” for securing a reduced rate of corporation tax in general for the North.

Like Eamonn Donaghy, from the lobby group Grow NI, who is also head of tax at KPMG Belfast, Coulter believes that Northern Ireland needs to secure a new rate of corporation tax to build a new economic future.

According to Donaghy, there is a lot of work going on behind the scenes to secure a more competitive rate but he believes that the final decision will come down to whether the political will is there to make it happen.

“A lower rate would deliver huge benefits for Northern Ireland – nobody is arguing about that – and we can already see what could happen if we don’t secure the opportunity to set our rate.

“We already have rising youth unemployment and potential investors are going next door to the Republic.

“If we don’t get a lower rate then what will we do? There is no plan B,” Donaghy warns.

Although a quiet optimism remains that Northern Ireland will eventually secure an agreement with the UK treasury to set its own rate of corporation tax, there is a growing frustration in the North that a deal seems to be quite far away on the horizon and unlikely to materialise before the end of the summer.

At the least, the prospect of the new patent box tax regime next year is a welcome ray of light for both Northern Ireland’s economy and aspiring entrepreneurs.