“A licence fee of 20% and a marketing fee of 15% of each sales invoice for “goods only” (that is not installation and freight) is payable to [USCO]. It is a requirement of [the GSA Contract] to maintain the services of an American corporation, located in the US, throughout the term of the contract “to assist and insure the Government of prompt and efficient contract administration” and “to assist in the resolution of any delivery, performance or quality complaints from customer agencies or to accept service of process in the event of any default by [UKCO] on behalf of the US Government.” [USCO] complies with the above terms. It collects US government cheques and EFT payments on behalf of [UKCO] and deducts the invoiced amount of licence fees and marketing fees before remitting the balance due to [UKCO]. Its main function is to co-ordinate the marketing of the {Invention} programme for a US base dealing mainly with {XYZ International Inc}, an American marketing company employing 34 full time representatives who specialise in the US government sector. The marketing commission payable to {XYZ International Inc} on any business generated by them is 12% which leaves the balance of the 15% marketing fee to the US office [ie USCO] to cover running costs. This arrangement saves [UKCO] the cost of employing UK [which may be a mistype for “US”] representatives to market their products into a foreign marketplace. No assets are required (or acquired) with respect to the marketing fee. In December 1997 [UKCO] acquired a licence from the inventor [Mr XX] to produce patent pending {Invention} products until termination of the agreement in December 2002 in consideration of payment of a licence fee of 20% of the FOB sales value goods in the {Invention} programme. Actual payment of the licence fee was agreed to commence from June 1999, after a start up period of grace. This licence fee amounting to£67,434.79 to 31/10/99 was assigned by [Mr XX] and collected by [USCO]. (Resources may be required in the US for future production and development of the American market in the event [the GSA Contract] is not renewed or if [UKCO] are unable to meet increasing demand to produce competitively in the UK.) As and when [Mr XX] receives income derived from assigned licence fees he will declare the same to the Inland Revenue.”
“… I should like to see the agreements under which the fees, marketing fees and supplementary commissions are payable. I should also like to see please a copy of recent accounts for [USCO].”
“It was eventually left that [adviser] would attempt to obtain the latest accounts from [USCO] and would also gather together the contracts between [UKCO] and [USCO]. Once he had these he would send them to [HMRC].”
“The contract under which all licence fees were paid by [UKCO] during the year ended31 October 2000 was a verbal contract.”
“Telephoned [adviser] 22/5/2. He did not know that there were no written contracts until just before the date of this letter.”
“As there are no written contracts it seems to me that the only way forward will be for me to see copies of [USCO’s] accounts. As both [USCO] and [UKCO] are under the control of the same persons I would have thought the quickest way would be for [UKCO] to obtain copy of [USCO’s] accounts and send these on to me. However as your client refused to do this I am attempting to obtain copies of the relevant accounts through departmental procedures.”
“… I had decided to temporarily register [the IP rights] in the name of [UKCO] since it was a new company with the {Invention} programme needing supplier credit and goodwill which holding these trade mark, patent and design registrations would bring to [UKCO]. Once [UKCO] had become established with its suppliers the aforementioned registrations reverted back to myself and they were re-registered in my personal name. No charges were levied to me by [UKCO] and the process had achieved the results I had planned. [UKCO] enjoys excellent relationships with its suppliers.”
“Licence fees – A deduction of£368,536 has been claimed in the accounts [for year ended31/10/2000 ]. 1. Please clarify who was entitled to receive these payments. 2. Please clarify whether these were made under the verbal agreement mentioned in [adviser’s] letter of19 April 2002 . 3. If not, please forward a copy of the agreement under which they were paid.”
“Licence fees – 1. [USCO] was entitled to receive the licence fees. 2. The licence fees were paid under the verbal agreement mentioned in [adviser’s] letter of19 April 2002 . 3. Not applicable (see 2 above).”
“… you refer to licence fee payments having been made to [Mr XX] and upon which you have determined tax is due. I would ask you to detail these “payments” as none has been made to him, nor recorded in our audited accounts. Our records show that we have paid US Dollar invoices raised to us by [USCO] for licence fees, by way of deduction from USD payments collected by them on our behalf.”
“Design, engineering and technical services in order to provide the {Invention} were the responsibility of [Mr XX] and his team of consultants and engineers; and these services were incorporated into the licence fee payable to [USCO].”
“From looking at [USCO’s] accounts this licence fee, as you say, does not appear as income. The company is stated to be engaged upon a business activity being “marketing and payments office” and the product or service is “marketing services”
“Following your letter of 11 March therefore I am now more firmly convinced that for tax purposes I should be treating [Mr XX] as being the recipient of the licence fee payments and not [USCO]. … I note you do not consider I am able to enquire here into [Mr XX’s] employment status as [Mr XX] has received a closure notice against an enquiry into his 2001 Return. … your assertion here is not accepted. The Revenue can make additional assessments where under section 29 [TMA] it is discovered that any income that ought to have been assessed to income tax has not been assessed. This can be done even after an enquiry had [ sic ] been closed. … I consider this to be the case here. The facts that now suggest that the income from the licence fee is for tax purposes treated as being [Mr XX’s] income by way of an employment (whether under PAYE or self-employed) have only recently emerged during my enquiry into the licence fee payments.”
“Neither the Acts nor the Courts have supplied any definition of these words, "other annual payment". There is authority for saying that the "category is quite a limited one ": In re Hanbury , 20 A.T.C. 333, at page 335. There is ample authority for saying that not all payments that are made annually are annual payments under Case III: Earl Howe v Commissioners of Inland Revenue , 7 TC 289 ; Hill v Gregory , 6 TC 39 . The reason for limitation lies in the fact that for the Courts Case III annual payments have been inseparably associated with payments from which tax is deductible in accordance with General Rules 19 or 21, and it has been thought to be inconsistent with the idea of tax being deducted at the source at the standard rate to allow within the Case payments that are likely to be gross receipts of the payee and not "pure income profit". Although this distinction may be a good general guide in determining the scope of Case III, it does not in all circumstances throw a very certain light upon the duty of the payer, who is not necessarily in a position to know whether or not the sum he pays will be treated as "pure income" or a gross receipt in the computation of the payee's tax. That in itself perhaps argues for a restricted interpretation of the words "annual payment". The word "annual" has not been found to admit of any significant interpretation. To the Courts it means no more than "recurrent": see, for example, Moss' Empires, Ltd. v Commissioners of Inland Revenue , 21 TC 264 - or even "capable of recurrence". That may be so, but I think that it would be both bad logic and bad law to deduce that merely because a payment is in fact recurrent or capable of recurrence it is therefore to be treated as an annual payment. In the end the question of what is or is not such a payment is a question of judgment formed in the light of the considerations that I have alluded to.”
“40. It is submitted that it would be difficult to determine what liability HMRC were intending to pursue, let alone determine their primary or secondary objectives, given the tenor and content of their pre-assessment letter dated19 April 2005 . In this letter Mr Meylan set out and then discredited a number of tax treatments. The gist of the letter was that [the Para 4 Assessments] were to be issued for completeness or back-up in the event that [UKCO] did not agree to any of the other tax treatments. Under the circumstances it could not be said that annual payments were the primary objective of HMRC at that time. … 49. In summary, [UKCO] contends … that neither ... Mr Meylan, nor his Group Director, could be said to have held an honest belief that [UKCO] “ought” to have included the licence fees in a return, and therefore the inspector should not have issued any assessments under this provision.”
“If licence fee is for tax purposes that of [USCO] – The situation remains that in my view the payments should be treated as annual payments in their hands and a tax deduction under section 349 ICTA 88 would be required. For the reasons outlined above I do not consider this is the case here as the licence fee should be treated for tax purposes as being received by [Mr XX]. You however have stated that you consider [UKCO] to have been trading with [USCO]. If the [Tribunal] accept that for tax purposes this income is validly [USCO’s] then I would need to present to them why in my view this would then amount to annual payments caught by section 349 ICTA 88 … The assessments will be under Paragraph 4(2) schedule 16 ICTA 1988 and for each year of enquiry will be for periods outlined in [earlier correspondence].”
“National Insurance contributions … My decision is as follows: 1. That [UKCO] is liable to pay primary and secondary Class 1 contributions for the period ended6 April 1999 to5 April 2001 in respect of the earnings of [Mr XX]. 2. The amount that [UKCO] is liable to pay in respect of those earnings is£74,126.39 . 3. The amount that [UKCO] has paid in respect of those earnings is nil. … If you accept this decision please pay … If you do not accept this decision please appeal … Interest may be charged on National Insurance contributions paid late.”
“[UKCO] contends that the NIC assessments for years 1999/2000 relate in part to [UKCO’s] return for year ending31 October 1999 . That return was the subject of an enquiry into the Licence Fees and the enquiry was closed without any amendments being required. [UKCO] understands that it would be necessary for HMRC to raise assessments for this period under discovery legislation and it is doubtful that they have done so.”