Trading or employment?

In XX v HMRC (and related appeals) (TC00689): the First Tier Tax Tribunal has confirmed that licence fees paid to an inventor (XX) by a company of which he was a director were trading income, and not employment income - saving National Insurance Contributions for the company at the very least.

XX invented a defence product which he patented and trademarked, and licensed to a company (UKCo). He was the managing director and his wife was the sole shareholder of UKCo. UKCo sold the product only to the US Government Department of Defence, via a second company, USCo. UKCo paid licence fees to XX for the .

The First-Tier Tribunal confirmed that XX should be charged tax on the basis that these payments were trading income, as XX was the owner of the IP and the payments were made to him in that capacity; the payments were not employment income. Although there was only one invention, the work on that and the ongoing work on refining the invention were enough to create an identifiable trade.

Points to watch:

Note that matters were not assisted by the patent application which stated that UKCo had the right be granted a patent because the inventor was employed by UKCo, even though the licence agreement stated that the intellectual property was and remained the property of XX! Although the Tribunal accepted that the company held the rights as nominee for XX, the wording did set off unnecessary hares with HMRC.

Also note that HMRC had obtained documents directly from the US tax authorities - particularly the licence agreement, which the IRS had obtained in a tax audit of USCo. HMRC have wide powers to obtain documents from a variety of sources.

Finally, XX had operated under the not-uncommon misapprehension that, if they kept the money offshore (the payments from the US Government were left in USCo) they wouldn't be taxable in the UK. As the licence agreement stated that the licence fees were due to XX directly, so that USCo only acted as collecting agent, life isn't that easy. XX was UK tax resident and domiciled, and so was subject to UK tax on his worldwide income and gains, even if they were kept in a piggybank company elsewhere.

Employee inventor compensation: an expensive pastime?

This is just a quick post on Kelly and another v GE Healthcare Ltd [2009] EWHC 181 (Pat), a Patents Court for England and Wales decision of Mr Justice Floyd on 11 February. This case has attracted some publicity (see eg here) since this is the first case in which employee inventors in the UK have been awarded compensation in respect of the outstanding benefits which their employer derived from the patent resulting from their invention.

Of note to readers of the IP Finance blog is that the hearing occupied nine days in court and that a very large proportion of the carefully-phrased judgment was given over to establishing (i) the quantum of the benefit the employer which the employer could be said to have derived from the patent and (ii) that amount that it was just that the employee inventors should receive. The judge reviewed various methodologies that might be deployed in seeking to establish the relevant quantum and explained the basis for his preferences. All in all, it was a most instructive -- if expensive -- exercise.  Part of the problem is that the financial records of trading companies do not relate, and can hardly be expected to relate, to the specific IP rights from which revenue streams or other advantages are derived. This means that the compensation exercise will always have a strongly forensic flavour about it, and it will always be likely to generate expensive and complex arguments.  It would be good to match the sums received by the employee inventors (in this case £1 million and £500,000 respectively) against the cost of bringing the case to court and establishing their entitlement to receive it.