Chapter BIM35710
| Published date | 22 November 2013 |
| Record Number | BIM35710 |
The treatment of sums received for allowing other concerns to use the taxpayer’s intellectual property depends on the precise circumstances of the transaction. See also BIM35501 for the Corporation Tax intangible fixed assets legislation, which may require the accounting entries in respect of know-how to be followed in computations of income for Corporation Tax, even if those entries are of a capital nature.
In the case of Jeffrey v Rolls-Royce Ltd [1962] 40TC443 sums received under agreements entered into with companies etc. in a number of countries for the sale of ‘know-how’ relating to aero-engine manufacture were held to be trading receipts.
During the manufacture of aero-engines Rolls-Royce had engaged in metallurgical research and the development of engineering techniques and acquired a fund of technical knowledge commonly called ‘know-how’. During the period 1946 to 1953 Rolls-Royce entered into a number of agreements with foreign governments and companies under which it agreed to supply information necessary to construct certain engines which it had developed and to license the other party to manufacture these engines. For example, by an agreement with the Republic of China the company undertook to license the Chinese to manufacture a Rolls-Royce jet aero-engine and to supply the necessary information and drawings; to advise them from time to time as to improvements and modifications in manufacture and design; to instruct Chinese personnel in their works and to release one or two members of their own staff to assist in China with the manufacture of the engine in consideration of the payment of ‘a capital sum of fifty thousand pounds’ plus royalties. Agreements in similar terms were entered into with the governments of Argentina, Belgium and Australia and companies in France, the United States and Italy. Some of these agreements provided for payment of an annual technical liaison fee in addition to the ’capital’ sum.
Rolls-Royce contended that the sums received related to the sale of a capital asset and were not trading receipts. The Revenue contended that the sums received under the agreements were normal receipts of a revenue nature of the trade or business carried on by Rolls-Royce.
On page 492 Lord Reid explained why the money that Rolls-Royce received was taxable income. Rolls-Royce had not disposed of any capital asset; the company retained all of the rights and knowledge in undiminished form. What Rolls-Royce had done was to exploit its...
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