“I have read, understood, and agree with this blog post”

An unimaginative, T&C-drafting hack, yesterdayI did wonder whether to come into work this morning, after I read John Kay’s piece in the FT on why reading T&Cs is a waste of time. Adding to the sense of futility this could engender about my chosen career was Prof Kay’s assertion that the lawyers who draft such documents are “mostly unimaginative hacks rather than hotshots of the profession”. How very dare you!

However, Prof Kay does make some very good points about why “there is nothing ‘irrational'” about ignoring the small print on websites or on the back of dry-cleaning tickets. To say that consumers ought to read all the T&Cs they encounter is to take an excessively “legal and economic” view of human behaviour. In fact:

The reality is that the terms of exchange in a market economy are defined by social expectations and enforced by the mutual need of the parties to go on doing business.

I agree. Another reason why I rarely bother to read the T&Cs on consumer websites, at least where they are based in the EU, is that I tend to assume that consumer protection legislation will step in to protect me from anything too outrageous hidden away in the legal terms. (I’m a little more beadily cautious with US-based sites. But only a little.)

The main reason, though, is that it is not merely rational to ignore the T&Cs, but actively irrational to insist on reading them all. To take just eight of the websites and digital services that I use on a regular basis, here’s a quick, back-of-a-fag-packet word count for their legal terms:

Google

  • Terms: 1814
  • Privacy: 2223
  • Total: 4037

Twitter

  • Terms: 3491
  • Privacy policy: 2235
  • Total: 5726

Tumblr

  • Terms: 5122
  • Privacy policy: 3403
  • Total: 8525

Facebook

  • Terms: 4308
  • Privacy: 2120
  • Cookies: 401
  • Total: 6829

Amazon UK

  • Terms: 5334
  • Privacy: 2834
  • Cookies: 932
  • Total: 9100

LinkedIn

  • Terms: 7558
  • Privacy: 6983
  • Total: 14541

YouTube

  • Terms: 3636
  • Community Guidelines: 722
  • Total: 4358 (NB: YouTube shares Google’s privacy policy)

Apple

  • iTunes Terms: 14274
  • Privacy: 2467
  • Total: 16741

That’s a total of 69,857 words for just eight websites – and that’s ignoring the multiple linked guidelines that sites such as Facebook have in addition to their core legal terms. This is the length of a shortish novel: extend that out to every website you use each day, and you’ll quickly be heading towards a reading challenge of Tolstoyan dimensions.

So why bother having these terms in the first place? Why does my employer have its own terms that are quite long? Why do I not feel a deep sense of personal futility when called upon occasionally to draft terms for websites or online services? Well, to return to Prof Kay’s point quoted earlier:

The reality is that the terms of exchange in a market economy are defined by social expectations

That’s all very well, but every business will know there are customers out there who will, not to put too fine a point on it, take the piss: “You never said we couldn’t do that! It doesn’t say we can’t in your terms!” So well-drafted consumer T&Cs are there, not to override the “social expectations” that are the true heart of the deal, but to embody those expectations and to protect them from abuse – by either party. Conversely, the occasional rows that blow up about a website’s terms usually stem from an attempt by that site to override users’ “social expectations”.

All that said, I believe (and fervently hope) that over time, as we all become more accustomed to life on the internet, and as the social expectations become more clearly understood by both businesses and consumers, the need for lengthy T&Cs will diminish – and we’ll see those word counts start to reduce.

The last word on this, though, should go to Eddie Izzard, who hit the nail on the head when it came to the infamous iTunes Terms and Conditions: see this gifset (the final frame from which adorns the top of this post).

Opening the Patent Box

A patent (unboxed), yesterdayIn recent years, the UK government (both this government and its predecessor) have come up with various ideas aimed at incentivising innovation through the tax system. The best known of these is probably the Patent Box (10% corporation tax rate on profits from patented inventions), but for many companies, the new R&D Expenditure Credit (the “above the line” replacement for the existing R&D tax credit regime) is of at least equal interest.

That’s all very well, but how is this actually playing out in the market? The Patent Box and RDEC apply from 1 April 2013, so there have now been six months to see how companies (and HMRC) respond to the new regime. A seminar I attended yesterday, hosted by Keltie, provided some useful insights into this from a team of PwC tax specialists.

Here are some of the trends identified by PwC which particularly struck me: 

  • Some companies that expected to benefit from the Patent Box are not doing so. PwC cited one manufacturer that campaigned vigorously for the Patent Box, but has found that its pension liabilities wipe out its trading profits – so the 10% tax rate has no benefit for it.
  • The Patent Box shows signs of having its desired effect of drawing businesses back into the UK. PwC mentioned an Anglo-Swiss company which is looking to bring its IP back into the UK once its current tax arrangements in Switzerland come to an end.
  • One difficulty companies are having is mapping their patents onto their products, in order to demonstrate that the products are generating income from patented inventions. HMRC are taking a hard line on this.
  • Companies need to ensure there is good communication between IP managers and tax teams. HMRC will not look kindly on a company that keeps claiming under the Patent Box using patents that have been allowed to lapse.
  • While the Patent Box tends to get most of the attention in the press, it is the RDEC that is proving most popular with companies so far – mainly because it offers cash upfront rather than a tax rebate later in the process.
  • The definition of “R&D” used by HMRC is very broad. You don’t have to be doing “blue-sky” research: incremental improvements are enough. What matters is that you are reducing “technological uncertainty”. Once you have “resolved technological uncertainty” – e.g. you reach a point where you can start commercial production – then the RDEC ceases to apply.
  • Manufacturing and R&D companies contracting on “cost-plus” terms (common with MoD contractors) will need to renegotiate these to disregard the RDEC, as this operates as a reduction of cost rather than a rebate on tax. This is one reason why the existing R&D tax credit scheme will continue to run alongside RDEC until 2016.

Some strange discrepancies are emerging between patent law and the Patent Box legislation (or at least HMRC’s interpretation of it…). For example:

  • The definition of an “exclusive” licence in the Patent Box legislation seems to differ from the definition in patent law. While the speakers didn’t go into details, it sounds as if the Patent Box definition may be somewhat wider.
  • HMRC is taking a restrictive approach to “systems” patents. For example, if a patented system has five components, of which three are incorporated into the product and two are “back-office” elements outside the product, HMRC are saying that the product does not qualify for the Patent Box as the patented invention is not “incorporated” into the product.
  • The seminar ended with a rather abstruse discussion about “use patents” – i.e. what used to be called “Swiss-type” claims, where the patent is not for the product (or component) itself, but for the use of a known product in a new way. HMRC are perceived to be resistant to this type of invention.
  • It also remains to be seen how HMRC will deal with interim patent applications, where the original priority application is dropped once the full application is made a year later. If HMRC insist on dating the Patent Box rebate only from the date of the full application, rather than the priority date of the interim application, this could have a major impact on patent practice.
  • The consensus was that HMRC doesn’t understand patent law, and doesn’t yet realise that it is going to have to learn.

What about HMRC’s attitude in all this? The picture seems to be a mixed one:

  • The relevant HMRC teams are actively encouraging companies to consider the Patent Box and RDEC, and are keen that companies engage with them early in the process to ensure they don’t make any mistakes that will reduce the benefit to them.
  • That said, as noted above HMRC are taking a hard line on some of the requirements, and are showing some idiosyncratic interpretations of patent law.
  • HMRC are also keen to remind people of the anti-avoidance provisions in the legislation: you can’t artificially incorporate patents into your products (e.g. putting a patented sticker on a car won’t mean the car qualifies for the Patent Box), and you can’t artificially relocate your IP in the UK to try to qualify. “It’s a generous regime, but don’t take the mickey,” is the message.
  • HMRC like to talk to the development teams within companies, particularly so they can find out how the patented invention is incorporated into the product. 

It will be interesting to see how the Patent Box and RDEC develop over the next few years – especially given the political hostility that they are already attracting in some quarters. I heard a speaker last year wonder aloud as to how long it would take for the Patent Box to be perceived, not as a creative incentive to innovation, but as a “tax loophole”, and it seems to be coming to pass already (FT link, naturally… 🙂 ).