Commentary on Sections Overview Overview Section 903: Deduction from patent royalties
2742.This section requires the deduction of sums representing income tax from patent royalties. It is based on sections 4, 7, 125, 348(2) and 349(1) of ICTA.
2743.In addition to annual payments, deduction applies to any royalty or other sum in respect of the use of a patent under sections 348(2) and 349(1)(b) of ICTA.
2744.If a payment in respect of a patent is also a qualifying annual payment then this section does not apply (subsection (2)(a)). This clarifies that deduction does not apply to a patent royalty which is an annual payment and is paid by an individual otherwise than in connection with the individual’s trade. See Change 139 in Annex 1.
2745.In the case of annual payments, the source legislation states explicitly that to be caught by the deduction rules a payment has to be assessable under Schedule D Case III. That rule carries with it the requirement that the payment should arise in the United Kingdom. There is no such explicit statutory rule covering patent payments that are not annual payments. Normally those payments are not assessable under Case III. But in practice it has always been the case that, for such a payment to be subject to the deduction rules, it must arise in the United Kingdom. Subsection (3) makes this explicit.
2746.Subsection (4) makes explicit that deduction is to apply only where the payment is charged to income or corporation tax. See Change 140 in Annex 1.
2747.This section applies to payments by any person, but otherwise largely follows the format of section 901. If the payer is an individual or has some modified net income, then the tax is collected as part of the payer’s self-assessment under Chapter 17. If the payer is not an individual and has no modified net income, then the tax is collected under Chapter 15 if the payer is a UK resident company, and under Chapter 16 otherwise. See Changes 81 and 138 in Annex 1 and the commentary on section 900.