.png)
.png)
My client, who is not a professional inventor, patented a device and subsequently entered into an agreement with an unconnected limited company whereby he agreed to 'assign, sell and transfer all his right, title and interest in the patent'. The consideration was to be paid over a number of years in the form of 'commission payments' based on sales of the device. Annual statements issued by the company actually referred to 'royalties' and basic rate tax was deducted at source by the United Kingdom payer.
My client, who is not a professional inventor, patented a device and subsequently entered into an agreement with an unconnected limited company whereby he agreed to 'assign, sell and transfer all his right, title and interest in the patent'. The consideration was to be paid over a number of years in the form of 'commission payments' based on sales of the device. Annual statements issued by the company actually referred to 'royalties' and basic rate tax was deducted at source by the United Kingdom payer.
Am I correct in assuming that we are looking here at Schedule D, Case VI receipts? In the hands of an inventor, patent royalties are relevant earnings for personal pension scheme purposes, but is my client now receiving a different form of income in this context? The agreement itself is assignable: could my client sell it to his son for a nominal amount without any adverse income tax or capital gains tax implications?
Readers' assistance would be very much welcomed.
(Query T15,805) – UCM.
In general, section 529, Taxes Act 1988 treats as earned income (for all purposes) any income from patent rights arising to an individual where the patent was granted for an invention actually devised by him.
In Chapter IV (personal pension schemes) of Part XIV, Taxes Act 1988 the expression 'relevant earnings' in section 644(2)(d) is stated to include income treated as earned income by section 529 above.
By section 524, Taxes Act 1988 the proceeds of the assignment by the client, if capital, are subject to income tax under Schedule D, Case VI, either all at once or spread over six years.
In the past, patent right disposals treated as capital rather than as royalties escaped income tax under rules now found in section 349(1)(b). From such early cases as Desoutter Bros Ltd v Hangar & Co Ltd & Artificial Limb Makers Ltd [1936] 1 All ER 535 it can be seen that payment of a lump sum by instalments does not convert capital into income.
In 'UCM's' case, it is thought that the company was wrong to deduct income tax, although the client may wish to acquiesce, since treatment as capital would make him taxable over six, rather than ten, years.
Assignment to the son would expose the client to a chargeable gain on the market value of what passes, having regard to sections 18 and 37(3), Taxation of Chargeable Gains Act 1992. – Lane.
The position is confused: the inventor has either sold his patent to the company or he has granted the company the right to use the patented device on payment of a royalty. The wording of the agreement suggests he has sold the patent in which case he will be taxable under Schedule D, Case VI on the capital sum payable (section 524, Taxes Act 1988).
Unless the inventor elects otherwise the proceeds are taxable spread over six tax years commencing in the year in which he receives the payment. If the inventor is resident in the United Kingdom, the purchaser should make the payments without deducting tax. If the inventor is not resident, however, the purchaser should deduct basic rate tax from the payment.
It would appear that the proceeds from the sale of the patent are linked to sales of the product and payable over a number of years. The inventor can therefore spread the annual payments over six years commencing with the year in which he receives each annual payment.
Where income is received from a patent by the inventor of that patent, it is treated as earned income under section 529, Taxes Act 1988. (Income from a patent includes a capital sum taxable under section 524, Taxes Act 1988.) Income taxable under section 529 is included within the definition of relevant earnings by section 644(2)(d), Taxes Act 1988.
If the agreement is for deferred consideration based on future sales and the inventor assigns his rights under this agreement to his son, he will be disposing of a right to future consideration and this will be a disposal subject to capital gains tax under section 22, Taxation of Chargeable Gains Act 1992. – G.S.
