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Intellectual Property

January 20, 2014

Mark made the following contribution to a debate in the Chamber on intellectual property:

Mark Field (Cities of London and Westminster, Conservative)

It is a great pleasure to follow the hon. Member for London South East or wherever it is.[Interruption.] Sorry, I mean Jim Dowd. We Londoners rightly feel that the centre of the universe is here, but we need to make some allowances for Members from Manchester, Withington and elsewhere.

I recently discovered that I have something in common with the hon. Member for Lewisham West and Penge; we both have German mothers. I must confess that my mother spent the first 15 years of her life living under socialism, courtesy of the Gestapo and then the Stasi, which is why she inculcated some solidly right of centre and Conservative views in my mind. I am not sure what went wrong with the hon. Gentleman’s upbringing. However, I very much agreed with what he and other contributors have had to say today. We must emphasise the underlying importance of intellectual property both to the UK economy and my own central London constituency.

The people of these islands have a long and proud history of innovation. Much of what we take for granted in the modern world came about as a result of various aspects of British ingenuity. However, in an increasingly globalised world, much more must be done to protect the IP that is developed in the UK, so that we can attract the world’s brightest to invest here or to develop their ideas here.

The high-tech sector is naturally a sizeable generator of intellectual property. I welcome the fact that the Bill seeks to reduce the need for costly litigation and provide greater certainty for investors in new designs and technologies. I believe that such reforms send out a clear signal that the UK is open for business and they will play an important role in helping the UK to succeed in these highly competitive international markets.

Over the past five years or so, on the fringe of the City of London, which I represent, Tech City, commonly referred to as Silicon roundabout, has emerged almost from nothing and has quickly flourished into a renowned European IT hub. In my view, that is precisely the type of location where much of the £16 billion of intellectual capital produced annually in the UK originates. We all pay lip service to boosting traditional manufacturing, but it is in the IT and IP fields that we face great international competition. The Government’s strategy to maintain a distinctive reputation and a great competitive advantage over the export of IP is, I believe, vital to future economic growth.

In Soho, Covent Garden and the west end as a whole, in my constituency, we find the spiritual home of our globally competitive creative sector, which includes film, music, television, theatre and, of course, the animation industries. Those creative industries are one of the great white hopes for economic growth. I spearheaded a five-year parliamentary campaign to secure a tax credit for the animation industry and I was delighted when it came to fruition in last year’s Budget. I am afraid it still has a few teething problems in relation to the European Commission, but slowly but surely we are getting there.

I hope that the tax credit will help to keep animation jobs on these shores, but the real golden egg, as we all know, is the retention in this country of the IP rights. Money is generated annually worldwide by unimaginably successful animation franchises such as Thomas the Tank Engine, Wallace and Gromit and Peppa Pig—as I have two young children, I am now rather more used to that, as I am sure you are well aware, Madam Deputy Speaker. They all have a huge amount of secondary branded products. Let me give some perspective. The Thomas the Tank Engine brand alone tots up worldwide sales in excess of £1 billion each and every year, with his tales broadcast to more than 1 billion households in 185 countries each and every day.

It is important that we allow no room for complacency about the west’s domination, as we see it, of the knowledge economy. Within the next 20 years, I suspect that the IP rights that have underpinned the west’s competitive advantage—whether in licensing, copyright, design or patents—will be due for a radical philosophical shake-up. An ever more assertive China will argue that traditional IP structures are no more than an attempt by Europe to impose its own form of protectionism to suit its particular demographic. We cannot assume that the dominance of our values in determining global trade will remain unchecked.

To that end, the aspects of the Bill that are aimed at improving the operation of the IP system internationally are most welcome. The recognition of foreign copyright claims in the UK and enabling the Intellectual Property Office to share information on unpublished patents with other patent offices should, in principle at least, make it easier for UK companies’ IP rights to be respected internationally. However, clause 13 introduces a new criminal offence of deliberate infringement of a registered design, but, as Mr Wright rightly pointed out, the vast majority of the UK’s 350,000 designers rely on unregistered design rights. There should be consideration of whether the criminal sanctions could and should be extended to include them as well.

Only about 4,000 designs are registered each year with the IPO. That pales into relative insignificance when compared with the 18,000 to 25,000 unregistered designs placed on the ACID design database last year,

especially as the organisation has only 11,000 members. Given the vast amounts of capital invested in developing brands and the economic benefits that creates, I agree with the hon. Member for Hartlepool that it seems advisable to at least consider in Committee whether criminal sanctions for the infringement of copyright online should match the level of sanctions for the infringement of physical goods. As our lives increasingly shift online, the discrepancy between the maximum penalties for online copyright theft, with a maximum of two years’ imprisonment, and physical copyright theft, with a maximum of 10 years, seems in need of updating. The Minister made it clear that he recognises that the situation is fast moving. The Bill itself will no doubt be largely redundant within a few years, so we need to be aware of those changes.

In my work as a member of the Intelligence and Security Committee, I am increasingly aware that malicious cyber-activity such as the ongoing and daily attempts to steal British-owned IP—whether that involves patents, ideas and designs—is carried out primarily to gain competitive commercial advantage. Such efforts, I fear, are commonplace and are getting more common as time goes by. Much more will need to be done to tackle cyber-security internationally.

On a more parochial and local basis, in 2009, I worked with a group of local entrepreneurs and recommended the development of a start-up business incubator, now called the innovation warehouse, to the economic development office of the City of London corporation. I am pleased to say that that proposal was strongly supported financially and generally by the corporation. It is now based on the northern edge of the City, in Smithfield market. It opened in May 2011, and it provides 88 desks, counts more than 50 small businesses as tenants and provides a range of business-related mentoring and other events each month.

The dynamic office and incubation space developed at Smithfield market not only provides much-needed resources for small and growing businesses, but houses a large number of high-growth potential start-ups that have gone on to secure significant investment. I am sure that one of the Bill’s longer-term effects is that we will see such innovation not just in the gilded parts of the City of London, but in all the suburbs and, indeed, in many other UK cities. The scheme has rightly received praise from central Government and has become a destination of choice for UK Trade & Investment tours of Tech City. It is in my view precisely the sort of initiative that needs to be encouraged if the UK is to continue to aspire to be a world leader in IP, as the 21st century develops.

The Government could do a little more to encourage the development of IP in the UK. At a City round-table meeting on IP a year or so ago, I met a former engineer and investment banker who now helps technology start-ups. He had worked as a part-time chief financial officer for a tech spin-out from one of Britain’s top research universities. In the end, although it was backed by a quasi-governmental venture capital fund, the technology was sold prematurely to a large French company, as it had proved impossible to eke out the limited VC funding to expand the fledgling enterprise. Had it not been for the complexity of Her Majesty’s Revenue and Customs rules and an equity gap in first-stage venture capital, he

believed that the UK Treasury would by now have been enjoying the rewards of fresh job and corporation tax receipts.

New tech businesses are typically nucleated when a piece of IP is picked up by a small team of high-calibre executives who practically apply and market that technology. Seed funding of £50,000 to £250,000 is typically not too difficult to come by, but founders’ resources, or those of business angels, can be tapped and new Government mechanisms, such as the seed enterprise investment scheme, incentivise investment in the early stages. However, the next part of the corporate journey—to obtain between £l million and £5 million in more conventional first-stage venture capital—represents the big stumbling block to expansion.

The structural shortage of such funding in the UK is exacerbated by the fact that, before these start-ups begin generating revenue, a large share of funds goes towards paying executives’ salaries. Therefore, the taxman gets much of the VC money through employer and employee national insurance and pay-as-you-earn tax. That is, of course, particularly ironic because, in many instances, a quasi-public source has helped to generate the VC funds in the first place.

To work through this problem, many start-ups eke out their VC money by instead rewarding executives with sweat equity. Since many such participants are perhaps established people in the 45-to-60 age bracket, they tend to have an existing financial cushion that leaves them able to work for free in the short term in return for those shares. However, HMRC rules currently insist that such shares are valued and treated as taxable salary. To pay the tax charge associated with the granting of shares for which there is no liquid market and which might turn out to be worthless in the end, executives must raid their savings. In short, when a start-up fails, as is often the case, executives have paid from their own resources for the privilege of working for free. That common problem is part and parcel of the whole intellectual property package that we are looking at today.

Partial work-rounds are in place based on approved share option schemes, but they are complex and hard for many SMEs properly to understand and administer. The Government could do a little more to solve the conundrum. As other Members have said, it is often difficult to say precisely where the responsibility for intellectual property lies. I am therefore taking the opportunity of this debate to say that, although perhaps other Ministers have a part to play as well, we need to try to find a way to ensure that such share rewards are not crystallised during the tax year in which they are awarded. The tax could be levied instead when the shares are withdrawn from escrow.

Bob Stewart (Beckenham, Conservative)

I am not sure, but would not the answer be to allocate shares, rather than to give them? If shares are allocated, people do not have to pay tax on them, yet they are their shares when they want to cash them in.

Mark Field (Cities of London and Westminster, Conservative)

I am sure that my hon. Friend has a little more knowledge of that. I think that some specific problems apply to small start-ups in the venture capital world and, as I have said, for individuals who, for tax purposes, would not want an allocation, other than at a particular time when it was known that the venture would work through.

I do not want to be overly negative, because I think that the Bill is an important piece of legislation. It reflects the commitment that the Government, rightly, have made in this area. We can be proud of our place in the global league tables for intellectual property rights, but we have no cause for complacency. We are perhaps ahead of the game, or cheek by jowl with Germany and the Netherlands, which I think—without being complacent —is a good place to be.

I am fairly supportive of what the Government are trying to do, which is to make the IP landscape easier to navigate for businesses, especially small and medium-sized enterprises, many of which will be looking to expand globally and make an impact for the future. It is of underlying importance that the Bill will make better off UK businesses that wish to protect their products and technologies through patents and design rights. The Government must continue to focus their attention on doing more to encourage investment and to secure IP rights if Britain is to remain a global player in what I am sure will be, in decades to come, an extremely competitive international market.