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HMRC internal manual

Business Income Manual

Meaning of trade: scope of trade: The Rees Roturbo Development Syndicate Ltd v Ducker [1928] 13TC367

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 the general purpose of acquiring patents, licences and concessions, to improve them, use them and turn them to account. A specific purpose was the acquisition of patents in a centrifugal turbine pump. The company’s memorandum of association contained the power to sell, dispose, turn to account and grant rights and privileges in respect of the company’s property.

The company acquired an interest in the patent relating to the pump and subsequently also acquired interests in foreign patents granted in respect of the invention. The company did not undertake manufacturing activities under the patents, but granted licences for others to manufacture the pump in return for the payment of royalties. The agreements it entered into with some manufacturers contained the right, in certain circumstances, for them to acquire the whole of the foreign patent rights. A number of the manufacturers duly exercised this option, acquiring the foreign patent rights in return for a further payment.

The company contended that the company’s business did not include buying and selling patents, that the patents were fixed capital assets of the company and were held for the purpose of obtaining royalty income.

The Commissioners held that the profits on the sale were trading profits.

Rowlatt J in the High Court, concluded that the Commissioners had found that the company’s trade included the buying and selling of patents and that they had evidence on which to base their conclusion. However, he expressed his unease, given that the opposite conclusion had been reached, on very similar facts, in the case of Collins v The Firth-Brearley Stainless Steel Syndicate Ltd [1925] 9TC520 (see BIM21015).

The House of Lords agreed, unanimously, that the Commissioners had not misdirected themselves and had abundant evidence on which to base their conclusion of fact.