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HMRC internal manual

Business Income Manual

Capital/revenue divide: intellectual property: authors: disposal of various material and rights

When a trader disposes of stock in trade otherwise than in the course of that trade the question arises what should be brought into account for the purposes of tax on the trade profits. There is legislation that provides that the market value must be brought in (see BIM33630). The legislation applies to trade profits; it does not apply to professional profits. But sums derived by an author from the sale of their worksheets, notebooks, draft manuscripts, correspondence and so on are taxable as receipts of the profession, being normal incidents of an author’s profession.

In the case of Mason v Innes (44TC326) the taxpayer had carried on the profession of author for many years, and novels by him had appeared regularly at intervals of about two years. On 4 April 1960 he assigned to his father by way of gift his rights (of the then market value of £15,425) in a novel published in the following October and based on material gathered on a visit to the Persian Gulf in 1953. His profits for income tax purposes were computed on the cash basis, and he had been allowed as a deduction expenses incurred by him in the preparation of the novel, including the cost of his visit to the Persian Gulf.

The taxpayer was assessed to income tax for the year 1960-61 on the footing that the market value of the rights assigned as aforesaid should be brought in as a receipt of his profession. The Special Commissioners held that, although the writing of the novel and the disposal of the rights therein took place in the course of the taxpayer’s carrying on his profession, those rights were not stock-in-trade and therefore the decision in Sharkey v Wernher did not apply.

In the case of Wain’s Executors v Cameron (67TC324) Wain was a professional author from 1955 onwards. Starting in the USA in the early 1950’s a practice grew up by which academic institutions and others acquired from well-known authors their worksheets, notebooks, draft manuscripts and correspondence. On advice Wain, who had previously destroyed draft papers and manuscripts, decided to keep them. Between 1959 and 1961 he sold to dealers, part of a manuscript and certain other items.

Until 1974 Wain deposited his papers at Reading public library on loan. In 1974 he transferred the papers to Edinburgh University, also on loan. In 1979 the collection of papers was valued. In 1985 there was an exhibition of the papers.

Meanwhile Wain had started to write a major novel. This reduced his ability to produce other income-generating writing, so, to provide a financial cushion he asked Edinburgh University to buy his collection of papers. In August 1986 Wayne accepted the University’s offer to buy the collection for £25,000 payable in three equal instalments; the first immediately and the second and third in July 1987 and July 1988 respectively. The payments were all duly made. Wain continued to deposit his further working papers at Edinburgh University with a view to future sales.

Wain died before his appeal against assessment came to the High Court. The executors pursued the appeal.

Harman J in the High Court said that the exploitation by the taxpayer of anything produced in the course of his profession is taxable as a profit of the profession. He drew on an analogy made by Revenue Counsel, of an architect selling a model of a proposed building made by him in the process of selling the plans to a client, saying (on page 332):

‘It seems to me that that is a vivid, real and natural example. When one considers it carefully, obviously the proceeds of sale of the model are part of the fruits of the professional activity and are taxable as such, although the model itself was not originally made with a view to turning it into profit, in the sense of it being realised by sale.

If that be sound, as I consider it to be, the same must apply to an author. In my view, as a matter of law there cannot be any legitimate distinction between the activities of an author writing and the activities of an architect designing and making a model. Both are carrying out their professional skills in the course of their professional vocations. The fact that they have different rights in different parts of the results of the particular profession does not to my mind show that those results are not both … profits “from any trade, profession or vocation”.’

The Special Commissioners found as a fact that Wain had created the items in question in the course of his profession.