Annex 1: Minor changes in the law made by the Act: Change 152: Intellectual property receipts which are earned income for the purposes of the Income Tax Acts: paragraph 338 of Schedule 1 (section 833 of ICTA)
This change concerns certain capital receipts from intellectual property which fall within the definition of “earned income” for the purposes of the Income Tax Acts.
Section 529(1) of ICTA provides that “income from patent rights” arising to an individual is in certain circumstances to be treated as earned income. The circumstances are where the patent was granted for an invention devised by the individual, whether alone or jointly. If any part of the patent rights has previously belonged to someone else, only the part of the income which is not attributable to the rights owned by the other person counts as earned income (section 529(2) of ICTA).
There is no definition of “income from patent rights” in Chapter 1 of Part 13 of ICTA. Section 533(1) of ICTA defines “patent rights” as the right to do or authorise the doing of anything which would, but for that right, be an infringement of a patent. The section also contains a definition of “income from patents” covering:
	any royalty or other sum paid in respect of the user of a patent;
	any amount on which tax is payable under section 524 (taxation of receipts from sale of patent rights) or 525 (taxation of such receipts on death, winding up or partnership change) of ICTA; and
	any amount on which tax is payable under section 472(5) of or paragraph 100 to Schedule 3 to CAA 2001 (balancing charges).
In practice, all the kinds of income mentioned in this definition of “income from patents” are treated as if they were “income from patent rights” for the purposes of section 529(1) of ICTA. It is not thought that there is any other kind of income which is covered by the reference in that section to “income from patent rights”.
It benefits taxpayers for the amounts mentioned in the definition of “income from patents” to be treated as earned income for the purposes of the Income Tax Acts.
Earned income is excluded from the rule in section 282A of ICTA that, in a case where the property from which income arises is jointly owned by a husband and wife, it is to be treated as income to which they are entitled in equal shares.
Income treated as earned income by virtue of section 529 of ICTA also falls within the definitions of “relevant earnings” which apply for the purposes of Chapters 3 (retirement annuities) and 4 (personal pension schemes) of Part 14 of that Act (see sections 623 and 644 of ICTA respectively).
The amendment to section 833 of ICTA in paragraph 338 of Schedule 1 to this Act rewrites section 529 of ICTA as subsections (5B) to (5E) of section 833 of that Act. These subsections form part of the main definition of “earned income” for the purposes of the Income Tax Acts.
Section 833(5B) of ICTA provides for “patent income” to be earned income in certain circumstances, mirroring the circumstances specified in section 529(1) of ICTA. The definition of “patent income” in section 833(5D) of ICTA follows the definition of “income from patents” in section 533(1) of ICTA (except that it is drafted by reference to the intellectual property provisions in this Act rather than in ICTA).
So section 833 of ICTA, as amended, confirms that the kinds of income referred to in the definition of “income from patents” in section 533(1) of ICTA are all to be treated as “earned income” for the purposes of the Income Tax Acts.
This change is in taxpayers’ favour in principle, but it is expected to have no practical effect as it is in line with current practice.