When a trader disposes of stock in trade otherwise than in the
course of that trade the question arises what should be brought
into account for Schedule D purposes. The decision in Sharkey v
Wernher (36TC275) was that market value ought to be brought in (see
BIM33610). Sharkey v Wernher applies to
Case I of Schedule D; it does not apply to professional authors
taxed under Case II of Schedule D. But sums derived by an author
from the sale of their worksheets, notebooks, draft manuscripts,
correspondence and so on are taxable under Case II of Schedule D,
being normal incidents of an author’s profession.
In the case of Mason v Innes (44TC326) the taxpayer had
carried on the profession of author for many years, and novels by
him had appeared regularly at intervals of about two years. On 4
April 1960 he assigned to his father by way of gift his rights (of
the then market value of £15,425) in a novel published in the
following October and based on material gathered on a visit to the
Persian Gulf in 1953. His profits for income tax purposes were
computed on the cash basis, and he had been allowed as a deduction
expenses incurred by him in the preparation of the novel, including
the cost of his visit to the Persian Gulf.
The taxpayer was assessed to income tax under Case II of
Schedule D for the year 1960-61 on the footing that the market
value of the rights assigned as aforesaid should be brought in as a
receipt of his profession. On appeal, he contended that the
decision in Sharkey v Wernher applied only to a trader the value of
whose stock-in-trade was required to be brought into the
computation of his profits for tax purposes, as distinct from an
author carrying on a profession, and, further, that it did not
apply where profits were computed on the cash basis. The Special
Commissioners held that, although the writing of the novel and the
disposal of the rights therein took place in the course of the
taxpayer's carrying on his profession, those rights were not stock-
in-trade and therefore the decision in Sharkey v Wernher did not
apply.
In the case of Executors of the Will of Professor John
Barrington Wain v David Charles Duncan Cameron (67TC324) Wain was a
professional author from 1955 onwards. Starting in the USA in the
early 1950’s a practice grew up by which academic
institutions and others acquired from well- known authors their
worksheets, notebooks, draft manuscripts and correspondence. On
advice Wain, who had previously destroyed draft papers and
manuscripts, decided to keep them. Between 1959 and 1961 he sold to
dealers, part of a manuscript and certain other items.
Until 1974 Wain deposited his papers at Reading public
library on loan. In 1974 he transferred the papers to Edinburgh
University, also on loan. In 1979 the collection of papers was
valued. In 1985 there was an exhibition of the papers.
Meanwhile Wain had started to write a major novel. This
reduced his ability to produce other income-generating writing, so,
to provide a financial cushion he asked Edinburgh University to buy
his collection of papers. In August 1986 Wayne accepted the
University’s offer to buy the collection for £25,000
payable in three equal instalments; the first immediately and the
second and third in July 1987 and July 1988 respectively. The
payments were all duly made. Wain continued to deposit his further
working papers at Edinburgh University with a view to future sales.
Wain died before his appeal against assessment came to the
High Court. The executors pursued the appeal.
Harman J in the High Court said that the exploitation by the
taxpayer of anything produced in the course of his profession is
taxable as a profit of the profession under Case II of Schedule D
(at the foot of page 331 and the head of page 332) and drew on an
analogy made by Revenue Counsel:
It is quite clear that there are separate items of property rights in any literary work created by writing on a piece of paper. There are the rights in the chattel and the rights in the copyright. But that is not a distinction which applies only to authors. Mr Brennan [Revenue Counsel] illustrated the matter extremely helpfully by referring to an architect. In response to a commission, he may design a building for which the copyright in the plans prima facie belongs to the architect but, subject to the terms of the contract, may be vested in the commissioning building owner. That would be a matter of contract between the designer and the building owner, and would be irrelevant for present purposes. For present purposes, copyright can be treated as being vested in the designer.
In the course of satisfying his client as to the proposed building to be built, the architect may make a model. The building is eventually built and the copyright in the design is perhaps assigned outright to the building owner. Possession of the chattel - the model - remains with the architect. The architect later chooses to sell the chattel. If the building has been a success and is of some note it may well be that the model will attract a substantial price. Mr Brennan's submission is that the model was produced by the architect in the course of his profession as an architect and for the purposes of that profession. The fact that it may well not have been produced with intent to sell it does not in any sense, says Mr Brennan, show that it was not produced in the course of and as part of the professional activity. The model is produced by the architect in the course of his profession and, as long as his profession continues - leaving aside cessation by death or other termination - when realised is part of the fruits of that profession.
It seems to me that that is a vivid, real and natural example. When one considers it carefully, obviously the proceeds of sale of the model are part of the fruits of the professional activity and are taxable as such, although the model itself was not originally made with a view to turning it into profit, in the sense of it being realised by sale.
If that be sound, as I consider it to be, the same must apply to an author. In my view, as a matter of law there cannot be any legitimate distinction between the activities of an author writing and the activities of an architect designing and making a model. Both are carrying out their professional skills in the course of their professional vocations. The fact that they have different rights in different parts of the results of the particular profession does not to my mind show that those results are not both, using the words of Schedule D, profits " from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere".
The Special Commissioners found as a fact that Wain had created the items in question in the course of his profession.
