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HMRC internal manual

Business Income Manual

Capital/revenue divide: intellectual property: authors: sundry receipts and expenses

The fruits of an author’s labours are taxable as profits of a profession and the expenses creating the literary work are deductible as explained in BIM35725. But the question arises from time to time as to when the income is to be taxed and when the deduction arises. There is no requirement to set expenses incurred in researching a future book against income arising from that book - there is no ‘matching’. Instead, the profits of the profession are to be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law, as with any other profession (see BIM30510). For an established author the income of a particular year may represent the fruits of the labours of several earlier years; the expenses of a particular year may well bear fruit in later years, or not at all if the project founders.

The case of Mackenzie v Arnold [1952] 33TC363 considered the treatment of receipts arising from the sale of copyright in certain novels that had been written at a time when the author was non-resident; the sales taking place after the author became UK resident. The author’s claim to deduct expenses incurred in writing the novels when he was not resident was dismissed.

In the Court of Appeal, Somervell L J said that the income was taxable for the reasons given in Glasson v Rougier and Howson v Monsell (see BIM35725). Somervell L J then went on to explain that none of the expenses incurred in writing the novels in question could be deducted because they were not expenses of the year but had been incurred at earlier times when the taxpayer was non-resident. Somervell L J also clarified that when Dankwerts J had referred to the receipt as being capital in Howson v Monsell that was not strictly correct (33TC at the foot of page 371 and head of page 372):

‘The only comment I would like to make on Danckwerts, J.’s decision in the Howson v Monsell case is this. It is a mere matter of terminology, but he did use the expression that sums may be subject to income tax although they are capital sums. Of course one sees, if I may say so, precisely what he means; the transaction is one which in certain circumstances would be regarded as the realisation of a capital asset. I think I myself would prefer to say: “Having regard to the provisions of the Income Tax Act and the circumstances of that and the present case, it is at any rate for the purposes of the Income Tax Act not a capital sum”.

The second point was this. Sir Compton Mackenzie had incurred in between the years 1911 and 1930, when these books were written, expenses amounting to £19,000. He claimed to deduct them, but the learned Judge proceeded, in my opinion quite rightly, on the basis that, if one takes the ordinary … cases where you are only considering the figures for one year, then the deductible expenses must be those incurred in that year . It seems to me quite clear that it is impossible, in respect of a profit in 1942 or 1943, to deduct expenses incurred between the years 1911 and 1930. As the learned Judge pointed out, and indeed Sir Compton Mackenzie agreed, if he had been in those years subject to the income tax code, expenses which he incurred in the course of his profession as an author could have been brought in and set against the profits in respect of the years in which they were incurred, and in that way account would have been taken of them under the code as applied by the learned judge.’

In the case of Household v Grimshaw [1953] 34TC366 the lump sum received by an author for cancellation of his contract with a film company was held to be taxable.

The taxpayer, an author, entered into an agreement with a film company which provided that for a minimum period of twelve weeks in each of three successive years he should render exclusive services to the company by way of writing and composing stories and other film matter. The agreement also provided that the company should have the option of acquiring at specified prices the film, etc rights of any novels written by the taxpayer and published prior to the expiration of the three years.

The taxpayer gave services in accordance with the agreement for the first period of twelve weeks, but a few months later the company wished to terminate the contract. A deed of release was executed under which both sides were released from their obligations under the agreement, the company paying £3,000 and acquiring an option with regard to the film rights of the taxpayer’s next three novels.

Upjohn J in the High Court considered the agreement that the taxpayer had entered into with the film company to provide services and grant options over literary works and concluded that it was not a contract of employment. The remuneration under the contract was therefore chargeable not as employment income but as part of the earnings of the author in the course of his profession or vocation. Upjohn J then went to consider whether the decisions in Van den Berghs, Barr Crombie and Kelsall Parsons (see BIM35530) were applicable. Upjohn J thought that those decisions did not govern this case:

‘For nine months of every year [the taxpayer] was at perfect liberty to carry on his vocation as an author without any restriction whatever, except that in respect of any novels that he might produce he had to offer the film rights during the currency of the agreement to Metro. True, for three months of that time he secured a valuable and, indeed, very lucrative employment with Metro. But I cannot regard this contract as being in any sense a capital asset such as was the case in Barr, Crombie & Co. The capital asset which the appellant has in this case is his own brain, talents and flair as an author and not this agreement, although it provided him with a very convenient remuneration to tide him over …’

Again you see the judge identifying an author’s brain as the capital asset and what flows from it as revenue.