XX v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 April 2010 |
| Neutral Citation | [2010] UKFTT 419 (TC) |
| Date | 29 April 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 419 (TC)
Peter Kempster & David Demack (Chairman)
The Taxpayers' Representative for both Appellants
Mr Adam Tolley of Counsel (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Payment of licence fees by company - whether income of inventor or a third party - whether trading income of inventor (yes) - whether employment income of inventor (no) - whether annual payments (no) - whether assessments defective or invalid (no)
1. The hearing of these appeals was held in private and this Decision Notice has been anonymised for publication.
2. This case concerns appeals against a number of assessments, determinations and decisions in respect of income tax and national insurance contributions ("NIC") for a number of tax years issued to the two taxpayers: UKCO and Mr XX (together, "the Taxpayers"). The appeals were heard together and in private pursuant to earlier case management directions.
3. UKCO produces and sells a speciality product. It has a single customer: the US Government Department of Defence. In its corporation tax returns for the four accounting years ended 31 October 1999, 2000, 2001, and 2002 UKCO claimed a deduction for payments of licence fees ("the Licence Fees"). The Respondents ("HMRC") contend that the corresponding receipt of the Licence Fees gives rise to UK tax liabilities and have issued assessments, determinations and decisions to the Taxpayers on a number of alternative bases of charge.
4. The assessments, determinations and HMRC decisions under appeal are as follows.
5. Assessments raised on UKCO under Income and Corporation Taxes Act 1988 schedule 16 subsec-or-para 4paragraph 4(2) of Schedule 16 to the Income and Corporation Taxes Act 1988 ("ICTA") covering the period from 1 November 1999 to 31 October 2002 ("the Para 4 Assessments"). In outline, a UK resident company is required to deduct at source basic rate income tax from certain "annual payments" and HMRC contend that the Licence Fees were such annual payments.
6. Assessments raised on Mr XX under Taxes Management Act 1970 section 29section 29 of the Taxes Management Act 1970 ("TMA") for the tax years 1999-2000 and 2000-01 ("the Schedule D Assessments"). In outline, HMRC contend that the Licence Fees were the trading income of Mr XX.
7. Determinations made in respect of UKCO under regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 for the tax years 1999-2000 and 2000-01 ("the PAYE Assessments"). In outline, HMRC contend that the Licence Fees were employment income of Mr XX so that UKCO had a liability to deduct PAYE at source.
8. Decisions in respect of primary and secondary Class 1 NICs due from UKCO for the tax years 1999-2000 and 2000-01 pursuant to paragraph 10 of Schedule 4 to the Social Security (Contributions) Regulations 2001 ("the NIC Assessments"). In outline, these supplement the PAYE Assessments and assess the NICs that HMRC contend are due from UKCO if the Licence Fees were employment income of Mr XX.
9. HMRC accepted that valid appeals had been made by the Taxpayers against all the assessments, determinations and decisions (which for brevity we shall call "assessments") described above.
10. The Taxpayers' grounds of appeal included a number of challenges to the validity of the assessments, as well as arguments on the bases of assessment.
11. The Tribunal took evidence as follows. For the Taxpayers: Mr XX adopted two witness statements dated 28 September 2008 and 16 December 2008, and gave sworn oral evidence; and Mrs XX adopted three witness statements dated 24 September 2008 and 16 December 2008 (two), and gave sworn oral evidence. For HMRC: Mr Neil Meylan (an HMRC officer in the Special Civil Investigations Office) adopted a witness statement dated 30 October 2008 and gave sworn oral evidence.
12. The parties did not present an agreed statement of facts. Where there was a contested issue we make a finding of fact as recorded below.
13. In the mid-1990's Mr XX invented an ingenious product called the {Invention}.
14. Mr XX and Mrs XX were the directors (and Mr XX was the managing director) of a company which on 2 December 1997 changed its name to UKCO. Mrs XX was the sole shareholder of UKCO. Mr XX was managing director of UKCO until July 2001. Mrs XX explained her understanding that she owned UKCO entirely and Mr XX owned the Invention product entirely.
15. On 12 December 1997 Mr XX and UKCO entered into a written agreement ("the Licence Agreement"), drafted by Mr XX without any legal advice. Mr XX executed the Licence Agreement personally under hand and the company seal of UKCO was affixed with Mrs XX signing as director and company secretary of UKCO, and there was a witness signature. The Licence Agreement included the following provisions (there was no clause numbering):
It is hereby accepted by [UKCO] that [Mr XX] is the inventor of all products hereinafter known as {Invention} and is the beneficial owner of all intellectual property rights, future rights, trade marks, design copyrights and other valuable assets of the said products and that [Mr XX] has complete autonomy and authority to use those intellectual property rights in any manner whatsoever.
It is now therefore agreed that [Mr XX] do hereby join with [UKCO] in a mutually binding licence agreement for the transfer of all such intellectual property rights in the products known as {Invention} from [Mr XX] to [UKCO] for a pre-determined fixed period, under licence, so that [UKCO] can commence the establishment of a manufacturing, sales and marketing business for the sale of {Invention}, material handling equipment and other related items within that industry.
The territory to this agreement shall encompass all world market areas where the above products can be sold and shall not be solely restricted to the United Kingdom. However, any further assignments of interests in the {Invention} to any third party company will only take place by express agreement and by the assignment rights being conferred by [Mr XX] to that third party.
It is further agreed that [UKCO] will be responsible for the manufacture, development and distribution of such {Invention}, material handling equipment and other related items under the {Invention} name and that [UKCO] will also be responsible for the application of Patent protection, trademark protection and design copyright protection of all items, seeking UK, USA and other world-wide protection, that may be deemed necessary so that the long term interests of [Mr XX's] inventions are adequately protected.
It is further recognised, that in the negotiations forthcoming with the US Government for the contractual sale of {Invention} products to US Government establishments, a corporate entity will be necessary in order to be able to negotiate and obtain such contracts, and that for obvious commercial reasons patent, trademark and design protection will be needed to protect the interests of [UKCO] and by implication [Mr XX] from any infringement of their rights. It is expressly agreed by [UKCO] that [Mr XX] is to be recognised as the inventor of such products and will be so named as such in any {Invention} patent applications, trademark protection and design copyright actions so that his long term rights as the inventor may not be prejudiced, whatsoever.
It is also agreed by [UKCO] that should it become necessary for a US company to be incorporated in order to comply with US Government requirements for contractual supply of {Invention} products to US Government establishments in the US, then this incorporation will be a decision at the sole discretion and agreement of [Mr XX]. Furthermore should this new company be charged with the sales and marketing of {Invention} products world-wide then the further transfer or assignments of any such aforementioned rights to the {Invention} programme is at the authority of [Mr XX] and is not that of [UKCO]. [UKCO] will only operate under the strictest compliance to the terms of this licence agreement and by agreement with [Mr XX].
The consideration was £1 paid and acknowledged on signature, plus:
On all sales generated by [UKCO] of {Invention} products ad other material handling related items [Mr XX] will receive licence fees from[UKCO] as remuneration for the use of his intellectual property rights over the licence period. The fees will be calculated as the sum total of 20% (twenty per cent) on the FOB values of each and every invoice raised and paid to [Mr XX] upon monies being received from the buyers. Such payments to be made to [Mr XX] in the currency of invoice used by [UKCO] and these payments are to be made directly to [Mr XX], or to his assigns, or as he so wishes and/or directs [UKCO] to so do.
It is agreed that payments to [Mr XX] under this licence agreement will commence 18 calendar months from the date of this agreement (ie June 1999). This grace period of non-payment is to allow [UKCO] the opportunity to develop the {Invention} product range, and to recover partial development costs prior to the licence fees commencing. Such information, relating to aforementioned sales to be maintained on file, and to be made fully available to [Mr XX] at all times and offered to him periodically by way of copy invoices.
This licence agreement granted to [UKCO] by [Mr XX] shall remain in force and be effective for a period of 60 (sixty) calendar months and will expire on the 11th day of December 2002. At that time all rights, whatsoever, to the sales, marketing, production or other uses, all patent rights, trade marks and design copyrights of the {Invention} will revert back totally to [Mr XX].
In compliance with the above, [UKCO] agree that upon the formal signatures being affixed to this agreement [UKCO] will execute a separate assignment document, which will transfer back to [Mr XX] all rights so...
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