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Business Income Manual

Meaning of trade: scope of trade: Collins v The Firth-Brearley Stainless Steel Syndicate Ltd [1925] 9TC520

The point at issue in the case was whether the sale of patents was a transaction on trading account or the disposal of fixed capital assets, i.e. did the trade include the buying and selling of patents.

The company was formed for, amongst other things, the purpose of acquiring patents to use, develop, grant licences or otherwise turn to account. It acquired stainless steel patent rights and was granted further foreign patent rights, relating to the invention, in 22 different countries. The company granted licences, for use of these patents, in a number of countries in return for royalty payments. However, in three cases they sold the patents outright. In one case in return for royalty payments throughout the life of the patent, in another for shares in what then became a subsidiary company and, in the third instance, for a lump sum payment and royalty payments throughout the life of the patent.

The company contended that the patents were fixed capital assets and had not been disposed of by way of trade.

The Commissioners (the predecessors of the Tribunal) decided that the amounts realised ‘were an appreciation of capital and not assessable profits’ and the Court of Appeal agreed that they had abundant evidence to support a finding that the company’s trade did not include the buying and selling of patents.

Atkins LJ noted, at page 573, that:

‘The question arises as to what was the trade of that Syndicate, because that it indeed carried on a trade I think cannot be disputed. But the question is what was the scope of the trade. For that purpose I think in order to examine the facts you must look at what the company purported to do, and also at what it did in fact’.

He concluded that there was nothing in the company’s memorandum of association that indicated its intention was to deal and trade in patent rights. He then posed the question whether there was anything in what the company did to indicate that it had not acquired the patent rights on fixed capital account, concluded there was not, and that the agreements `support very strongly the view taken by the Commissioners’.