In determining whether the sum in question is capital or
revenue, you should approach payments or receipts for intellectual
property in the same way as any other payment or receipt. For
transactions after 31 March 1996 allowances in respect of the cost
of know-how, which is not otherwise deductible, is governed by
ICTA88/S530.
The annual sums that a UK company received under a ten-year
agreement with an American company were held to be income in the
case of British Dyestuffs Corporation (Blackley) Ltd v CIR [1924]
12TC586. The UK company carried on the business of manufacturing
dyes. The UK company and the American company entered into an
agreement under which they undertook to communicate to each other
all particulars of patents and secret processes and other
information relating to the manufacture of dyes that they owned at
the time or might acquire during a certain period. The agreement
specified the particular territories in which each company had the
right to exploit such patents and secret processes. The UK company
was entitled to receive annually a sum of £25,000 for ten
years, provided that sufficient information in regard to existing
patents, etc, had been given from time to time to the American
company to enable a satisfactory product to be manufactured. The UK
company contended that the annual receipts of £25,000 were
instalments of a capital sum representing the sale price of an
asset. Rowlatt J found that the receipt was not derived from an
outright sale of the rights but was income and so taxable.
Bankes L J in the Court of Appeal (on page 596) agreed, again
distinguishing exploitation of the asset from outright sale:
It is really using this property, if you like, and taking an annual return for it roughly corresponding probably to its average life and not a sale once and for all of a capital asset, a light in which certainly it is not put by any words which are in the agreement.
Bankes L J went on to say that the test to apply was to identify if the taxpayer was parting with any of its property for a purchase price or was this simply a method by which the taxpayer carried on their trade:
…looking at this matter, is the transaction in substance a parting by the company with part of its property for a purchase price, or is it a method of trading by which it acquires this particular sum of money as part of the profits and gains of that trade?
By way of contrast and to emphasise that at the margin these can
be difficult cases to resolve, a lump sum received by a UK company
for disclosing certain secret processes and other information to
the Burmese Government was held to be a capital receipt in Evans
Medical Supplies Ltd v Moriarty [1957] 37TC540.
The UK company, which manufactured pharmaceutical products
and had a world-wide trade, carried on business in Burma through an
agency. In 1953 the Burmese government wished itself to establish
an industry there for the production of pharmaceutical and other
products, and the UK company secured a contract from the Burmese
government to assist in setting up this industry. The UK company
undertook to disclose secret processes to the Burmese government
and to provide other information in consideration of the payment of
a ‘capital sum of £100,000’. The UK company also
undertook to provide certain services and to manage the proposed
factory in return for an annual fee, which was admitted to be
subject to tax. No similar agreement had been entered into by the
company with any other foreign government or any other party.
The Special Commissioners and the Court of Appeal held the
£100,000 was income. The High Court and a majority in the
House of Lords did not agree, finding instead that the
£100,000 was a capital receipt.
Lords Simonds, Tucker and Denning held that, the case having
been stated by the Commissioners and the appeal argued throughout
on the footing that the sum of £100,000 was indivisible, it
was not open to the Court of Appeal to direct apportionment between
consideration for the disclosure of secret processes and
consideration for other matters.
Lords Simonds and Tucker were of opinion that the company had
parted with a capital asset for a purchase price. Lord Denning
considered that there was nothing wrong in the Commissioners'
finding that the amount in question was a payment for services, but
that it was not received in the course of the UK company's existing
trade of wholesale druggists, etc, and therefore could not be
brought into the assessment of the company's existing trade.
Lord Morton of Henryton, dissenting as to the cross-appeal,
agreed with the judgements in the Court of Appeal.
Lord Keith of Avonholm, dissenting, was of opinion that there
was ample evidence that the company was trading in
’know-how’ and that it was no more than a legitimate
extension of their existing trade.
The range of judicial opinion as to the ‘correct’
answer shows that even experienced judges well- acquainted with the
law and fully appraised as to the facts can and do come to
different conclusions in cases that are on the margin.
