ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle and may benefit some in practice. It also affects when tax is paid. But the numbers affected and the amounts involved are likely to be small. Change 139: Charges on income: no deduction of tax from certain patent royalty payments: section 903
This change removes any requirement to deduct sums representing income tax from patent royalty payments that are exempt under section 347A of ICTA or section 727 of ITTOIA.
Those sections exempt certain annual payments (defined as “qualifying annual payments” by section 899) if they are paid by an individual other than in connection with that individual’s trade. Because of those exemptions, the deduction at source provisions in section 348(1) and 349(1)(a) of ICTA do not apply to the annual payments covered by section 347A of ICTA and section 727 of ITTOIA.
Deduction at source might arguably still apply under sections 348(2) and 349(1)(b) of ICTA on the grounds that the payment is in respect of a patent, in the absence of a parallel proviso to that in sections 348(1A)(a) and 349(1A)(a) of ICTA. But it is not sensible for deduction at source to apply to a payment that is exempt regardless of who receives it. Moreover, sections 348(2) and 349(1) of ICTA require deduction of “a sum representing the amount of income tax” on the payment. It is doubtful whether this requirement could have any application in the case of payments that cannot be taxable income of the payee.
Accordingly, section 903, which is based on sections 348(2) and 349(1)(b) of ICTA, requires sums representing income tax to be deducted only from patent royalty payments that are not qualifying annual payments. If a qualifying annual payment (whether in respect of a patent or not) is paid by an individual in connection with the individual’s trade, deduction is made under section 900. If paid by a person other than an individual, deduction is made under section 901. But none of the rewritten deduction at source provisions applies to a patent royalty payment that is an exempt annual payment.
This change will affect very few cases. Most patent royalty payments by individuals will be made in the course of the individual’s trade. Furthermore, the exemption only applies to patent royalties that are also annual payments. Most patent royalties will not be pure income in the recipient’s hands, but will instead be taxable trading receipts.