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HMRC internal manual

Business Income Manual

Capital/revenue divide: intellectual property: authors: sums derived from copyright

The courts have on occasion made the analogy that the brain of a professional author (that is to say, an author chargeable to Income Tax under the charge on professional profits as opposed to the recipient of casual income from authorship chargeable as miscellaneous income) is their capital asset. Authors may gain income by selling their copyright in a literary or artistic work or by exploiting their copyright in some other way. The fruits of a professional author’s brain, be it copyright in a literary work or the rights to film such work or whatever, give rise to revenue receipts to be included in calculating taxable profits of the profession when they are exploited. The expenses incurred by an author in producing the literary work (writing materials, travel undertaken to research the subject, and so on) are allowable - such expenditure does not represent the cost of creating a capital asset; the capital asset is the author’s brain.

In the case of Glasson v Rougier (26TC86) the lump sum received by an authoress in commutation of future royalties was found to be a revenue receipt, and so taxable as profits of her profession.

The taxpayer, who was admittedly carrying on the vocation of authoress (writing under the name ‘Georgette Heyer’), entered into three agreements with a publishing company in 1925, 1932 and 1935, respectively. She granted limited publishing rights in respect of three books written by her (‘These Old Shades’, ‘Devil’s Cub’ and ‘Regency Buck’) in consideration of payments based on the number of copies sold. In 1940 these agreements were cancelled and the same limited publishing rights were transferred outright to the publishing company in consideration of a lump sum payment. The taxpayer had not previously entered into any similar transaction.

In the High Court Macnaghten J explained why the lump sum was taxable income. A sum received by a professional author for the sale of copyright represents taxable income. It does not matter that the sum is in commutation of royalty payments. The judge said on page 90:

‘It is well-settled that a sum of money paid in commutation of annual sums which are “income” for the purposes of the Income Tax Acts is chargeable to income tax; just as in the computations of the profits of a business a sum paid in commutation of an annual “expense” is allowed as an “expense”.’

The case of Howson v Monsell (31TC529) also involved the disposal of rights by an authoress for a lump sum and again the receipt was held to be taxable.

The taxpayer was a writer of historical novels (using the name ‘Margaret Irwin’); she retained the copyright in her books, drawing royalties based on the number of copies sold. She sold the film rights in two of her books (‘The Gay Galliard’ and ‘Young Bess’) for £5,000 and $75,000 respectively, which sums were paid in instalments over a period of years. Apart from the sales of film rights, Mrs Monsell retained the copyright in all her books, drawing royalties calculated in accordance with the number of copies sold.

Danckwerts J in the High Court held that the receipts were on revenue account and taxable as profits of the profession. The judge explained that the fruits of an author’s brain represent income of their profession. The disposal of the film rights (notwithstanding that these were the only such disposals) represented normal incidents in the course of exercising the profession of author and so the receipts were taxable income. He said at page 533:

‘It is often thought hard that authors should have to pay income tax upon capital sums which are the result of the sale of products of their own brain, but I have to administer the law relating to income tax as I find it and the keynote of this case is that Mrs. Monsell has been for a considerable time (since 1929 it appears) and is at the present time carrying on the vocation of authoress, an authoress of historical books. That being so it appears that even if the sums are capital sums yet if they are referable to the carrying on of her vocation they are none the less subject to income tax.’

(But see Somervell LJ’s clarification of Dankwerts J’s remarks that the sum was not a capital receipt, set out in BIM35730.) Danckwerts J summed up his decision on page 534:

‘It seems to me, having regard to the documents in the present case and the findings in the earlier part of the case stated by the Commissioners, it is plain that Mrs. Monsell received these sums by reason of the fact that she was carrying on the vocation of writer or authoress of historical books and that the receipt by her was plainly in the course of carrying on that vocation. That being so it is no answer to say the receipts were of a capital nature and that it followed that because they were of a capital nature they were not chargeable [as profits of the profession]. On the contrary it seems to me that in the circumstances if they are received by virtue of her work and in the course of her vocation they are chargeable [as profits of the profession].’