Philip Wilson Braithwaite v Her Majesty's Revenue & Customs, SPC 00674
| Jurisdiction | UK Non-devolved |
| Judge | Dr John Avery Jones CBE |
| Judgment Date | 01 April 2008 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | Philip Wilson Braithwaite |
| Reference | SPC 00674 |
| Court | First-tier Tribunal (Tax Chamber) |
Spc00674
ROYALTY – whether a payment for the Appellant’s services as stated in the document or a payment arising from the transfer of intellectual property and subject a declaration of trust in favour of his wife – the former – appeal dismissed
PHILIP WILSON BRAITHWAITE Appellant
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Special Commissioner: DR JOHN F. AVERY JONES CBE
Sitting in public in London on 26 March 2008
Richard Vallat, counsel, instructed directly by the Appellant
Rebecca Stubbs, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2008
DECISION
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Mr Philip Wilson Braithwaite appeals against discovery assessments for 1998-99 to 2000-01 and an amendment to his self-assessment for 2001-02 attributing certain income returned by the Appellant’s wife to the Appellant. The Appellant was represented by Mr Richard Vallat, and the Respondents (“the Revenue”) by Miss Rebecca Stubbs.
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The issue in this appeal is whether royalty payments based on sales of a product invented by the Appellant made pursuant to a deed of 10 July 1997 belong to the Appellant alone (as the Revenue contend) or to him and his wife equally (as the Appellant contends).
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There was an agreed statement of facts as follows:
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Mr Braithwaite invented a dry powder Inhaler (“the Mark 1 Inhaler”).
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Immediately before 24 October 1991, the intellectual property in the Mark 1 Inhaler was vested in a company called Technosystems Ltd (“T Ltd”). Mr Braithwaite owned 25% of the share capital of T Ltd and was entitled to 25% of the net income derived from the commercial exploitation of the intellectual property in the Mark 1 Inhaler.
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On 24th October 1991, T Ltd assigned the intellectual property in the Mark 1 Inhaler to a company called Innovata Biomed Ltd (“IBL”) pursuant to a deed to which Mr Braithwaite was also party (“the 1991 Deed”). Under clause 3 of the 1991 Deed IBL was obliged to pay Mr Braithwaite the greater of (a) 25% of the net income received by it from the commercial exploitation of the intellectual property in the Mark 1 Inhaler and (b) £6,000 per half year. Clause 3 was expressed to enure for the benefit of Mr Braithwaite, his personal representatives and his assigns.
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Between 1994 and 2003 Mr Braithwaite was employed by IBL.
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For all tax years up to and including 1996/97, Mr Braithwaite returned the full amount of the payments made to him under clause 3 of the 1991 Deed as his income.
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By Declaration of Trust executed on 3 April 1997 Mr Braithwaite declared that he would thenceforth hold all his rights and interests under the 1991 Deed and the income therefrom on trust for himself and his wife in equal shares.
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On 10th July 1997 Mr Braithwaite and IBL executed a deed (“the 1997 Deed”) under which IBL agreed to make certain payments to Mr Braithwaite linked to Mr Braithwaite discharging IBL of its obligations under the 1991 Deed and to the development of the Mark 1 Inhaler, including:
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Under clause 3.1.1 the sum of £750,000;
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Under clause 3.1.2 the sum of £66,000;
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Under clause 5.1.1 the sum of up to £750,000, in three tranches, the payment of the first tranche being made on execution, the payment of the second tranche on the granting of certain EU marketing rights in relation to the Mark 1 Inhaler and the payment of the third tranche on the granting of certain US marketing rights in relation to the Mark 1 Inhaler; and
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Under clause 5.1.2 the sum of 2.5 pence for each “Mark I Inhaler” sold (such sum to be increased in certain circumstances pursuant to clause 5.3). (There was a further “top-up” provision under clause 5.2 to ensure that the payments made each half-year in respect of payments under clause 5.1.2 were at least £12,500.)
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The payment under clause 3.1.1 of the 1997 Deed was returned as the capital (as to £375,000 each) of Mr and Mrs Braithwaite for the year ending 5 April 1998. The payment under clause 3.1.2 represented accrued income under the 1991 Deed and was returned as the income (as to £33,000 each) of Mr and Mrs Braithwaite for the year ending 5 April 1998.
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The first payment under clause 5.1.1 was returned as Mr Braithwaite’s income for the year ending 5 April 1998.
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The second payment under clause 5.1.1 was made on 3 November 1998 and returned as Mr Braithwaite’s income for the year ending 5 April 1999.
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The third payment under clause 5.1.1 has not yet been triggered.
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The following payments have been made under clause 5.1.2:
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Year to 5 April 1999 £33,332
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Year to 5 April 2000 £25,000
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Year to 5 April 2001 £24,072
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Year to 5 April 2002 £24,210
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These payments have been returned as income by Mr and Mrs Braithwaite as to 50% each for the relevant year of receipt.
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HMRC have not challenged the returns described at 3(8), (9) and (10) above.
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HMRC have assessed Mr Braithwaite to tax in respect of the full amount of the payments described at 3(12) above on the basis that those payments belong exclusively to Mr Braithwaite for tax purposes.
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I heard evidence from the Appellant and Mr Stuart William Sim formerly group finance director of ML Laboratories plc. I find the following facts:
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In 1990 T Ltd became a subsidiary of IBL which shortly thereafter itself became a subsidiary of ML Laboratories plc. IBL then owned 75% of the shares in T Ltd (25% having been transferred to it for nominal consideration by the Appellant’s former business partner) and the Appellant 25%. When it became clear that further development of the Mark I Inhaler would require significant expenditure the 1991 Deed was entered into containing an assignment for £1 by T Limited to IBL of the intellectual property (“IP”) in the Mark I Inhaler then consisted of four or five pages of sketches which comprised two UK registered designs and three patent applications. The Agreement recited that since the Appellant owned 25% of the shares in T Limited he was entitled to 25% of the net income from the commercialisation of the IP and the intention was that he should not be prejudiced by the assignment of the IP to IBL for nominal consideration. The Appellant became entitled under the 1991 Deed to 25% of the net income from the commercialisation of the IP calculated in accordance with standard accounting practice after deducting reasonable costs directly incurred in relation to such commercialisation. It was expected that IBL would licence the IP to a third party and so the only income would be a royalty
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In 1992 IBL licensed the IP to Bespak plc. The intention was that IBL would continue to develop a version of the Mark I Inhaler for its own pharmaceutical product, which Bespak would manufacture, and that Bespak would seek other customers and further develop and manufacture for those customers for a royalty based on sales.
IBL set up a facility for the development of the Mark I Inhaler and other products. The Appellant managed this initially as a part-time consultant, and from 1994 as a full-time employee earning £35,000 to £40,000 pa. By 1993-4 about 20 people were working there on the Mark I Inhaler and...
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