Chapter BIM35715
| Published date | 22 November 2013 |
| Record Number | BIM35715 |
Where a taxpayer sells part of their fixed assets the receipt will generally be on capital account. Where a taxpayer exploits their knowledge base by transferring know-how to others in exchange for payment (be that a lump sum, a series of regular payments, shares in the acquiring company or whatever) the receipt will generally be on revenue account. 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.
The case of Musker v English Electric Co Ltd [1964] 41TC556 was very similar to Jeffrey v Rolls-Royce Ltd [1962] 40TC443. English Electric, in the course of carrying on its trade of engineering manufacturers, acquired a fund of specialised information and technique in engineering processes. It had not been English Electric’s practice to turn this information and technique to account by imparting it to others. In 1949, however, at the request of the Admiralty, English Electric entered into an agreement to design and develop a marine turbine and to license its manufacture by a limited number of companies in the UK, Australia and Canada. Later, in 1950 and 1952, English Electric, at the request of the Ministry of Supply, entered into agreements with the government of Australia and an American aircraft manufacturing corporation, respectively, under which it licensed them to manufacture the Canberra bomber which it had designed and developed. All three agreements provided, amongst other things, for the imparting of ‘manufacturing technique’ to the licensees and in consideration of this the company received specified lump sum payments.
The courts found that the amounts received represented taxable income. Viscount Radcliffe in the House of Lords explained that when a company sells know-how for reward this does not involve a disposal on capital account any more than when a teacher imparts knowledge to a pupil (41TC at page 585):
‘In my opinion, there are two considerations which govern cases of this kind and which go a long way towards destroying the force of the analogies by which the appellant’s argument seeks to prove that the transactions under review were sales of fixed assets, and that receipts arising from them ought to be treated as receipts on capital account. One is that in reality no sale takes place. The appellant had after the transaction what it had...
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