ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL 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. Change 140: Deduction of tax: scope of duty to deduct from certain royalties: sections 903 and 906
This change enacts a principle of case law that determines the scope of the duty to deduct in certain cases involving payments in respect of royalties, patents, copyrights, design rights and public lending rights.
Where such payments are annual payments, the scope of the duty to deduct from annual payments can be seen from Earl Howe v CIR, (1919) 7 TC 289, CA. In that case Scrutton LJ said:
“The result of these Sections [corresponding to section 348 of ICTA] seems to be that the “annuities, interest, and other annual payments” which can be deducted to obtain exemption are those from which the claimant can deduct tax on behalf of the recipient; being in effect the profits of the recipient who bears the tax they are not also to be treated as profits of the person paying them. If no tax can be deducted on behalf of the recipient, they cannot be treated as profits of the recipient, and must be treated as paid out of profits of the person paying, who is therefore to be taxed on them.”
This principle was confirmed in the case of Bingham v CIR, (1955) 36 TC 254, ChD. In that case, a man resident in the United Kingdom made maintenance payments to his former wife who was resident in the Netherlands. The payments had been ordered by a Dutch court and so were not UK source income. He claimed to deduct those payments (which at that time were annual payments) from his income for surtax purposes. It was held that, since his former wife was not liable to UK taxation on the maintenance payments, sums representing income tax could not be deducted from the payments under what is now section 348 of ICTA, and they were not allowable as a deduction.
In the case of copyrights, design rights and public lending rights, sections 536, 537 and 537B of ICTA apply section 349(1) of ICTA as if the payments were annual payments. (The duty to deduct in such cases is rewritten in section 906.) So it follows that if the person whose income it is has no liability to UK income tax on the payments, the duty to deduct under section 349(1) of ICTA cannot apply.
There is nothing specific to apply the same principle to payments in respect of a patent (section 903). But Scrutton LJ’s discussion of the principle is wide enough to encompass patent payments. And there would be no logic in a policy that demanded deduction at source if a patent payment was also an annual payment, but not otherwise.
This change enacts the relevant case law in both sections 903 and 906 and aligns the statute with practice.