ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL Provisions about patent royalties
The source legislation takes a different approach as between annual payments and patent royalties.
The main legislation involved is section 51 of ITTOIA (which denies a trading deduction for patent royalties) and section 387 of ICTA (which, where tax is accounted for on a charge under section 350 of ICTA, enables relief to be given as a carry forward loss instead).
Section 387 of ICTA was introduced in FA 1928 in response to A-G v Metropolitan Water Board (1927), 13 TC 294 CA. That case concerned a payment of interest (interest being a charge on income at that time) which was found not to be payable out of income because the previous year basis of assessment then in force meant that it had been paid in a different year from that in which the corresponding income had arisen, and so the tax deducted was not covered. Section 387 addresses the inequity by allowing the amounts assessed under section 350(1) to count as losses to be carried forward against future profits.
Section 51 of ITTOIA (based on section 74(1)(p) of ICTA) prevents patent royalties from being deductions in computing trading profits. But it is still possible for patent royalties to give rise to a loss under section 387 of ICTA.
But annual payments are not prevented from being trade deductions, as is indicated (in an insurance context) by the case of Gresham Life Assurance Society v Styles (1892), 3 TC 185 HL. And sections 74(1)(m) and 817(1)(b) of ICTA were not rewritten for income tax purposes in ITTOIA, as they were unnecessary.
So any annual payment made wholly and exclusively for the purposes of the trade, profession or vocation (in accordance with the requirement in section 387(1) of ICTA) will already have been deducted in computing the profits of that business. So no further relief will be necessary or allowed, as section 385 of ICTA ensures that relief is only given under that section if it has not already been obtained elsewhere.
Accordingly, section 387 of ICTA only applies to patent royalties. And if it were not for section 51 of ITTOIA it would not be necessary.