§
Sub-section (3) of section fourteen of the Income Tax Act, 1918, shall be amended by adding at the end thereof the following words:
(d) any royalty or other sum paid in respect of the user of a patent where such patent has been taken out by the receiver of such royalty or other sum and is for an invention of his own and is still owned by him;
and sub-section (1) of section fifteen of the Finance Act, 1925, shall be amended by adding at the end thereof the following words:
and any individual making a claim and return as above who has received royalties or other sums as set out in section fourteen, sub-section (3) (d), of the Income Tax Act, 1918, under deduction of income tax, shall be entitled to such repayment of income tax as represents tax on one-sixth of the gross amount of such royalties or other sums, but not exceeding, together with any other yarned income relief to which he is entitled, two hundred and fifty pounds."—[Sir H. Buckingham.]
§ Brought up, and read the First time.
1522§ Sir HENRY BUCKINGHAMI beg to move, "That the Clause be read a Second time."
This is quite a small matter because it affects only a tiny class of the population, and the amount of tax involved is infinitesimal. The Clause is drafted in a somewhat technical manner, but the side note makes clear its intentions; that is to say, earned income relief is to be given in respect of royalties received by inventors. This is a new point and is not one of the hardy annuals that come before the House. As far as I know, it is the first time that it has been raised. It applies to the very few people who have the brains and ingenuity to create inventions, which are so frequently the basis of our commercial success. Therefore this small class is one that should receive generous treatment. The position to-day is that an inventor, if he lets out his patnet on royalties, does not get any relief on account of earned income from those royalties. In other words, the royalties from patents which remain in the patentees' hands are not ranked as earned income. That is because under Section 14 of the Income. Tax Act, 1918, though the definition of earned income is very clearly expressed, unfortunately the royalties received by people who have invented patents are not included under any part of that definition. I think that it will be obvious to the Chancellor and to the House that this class of person should certainly receive the benefit of the income derived from the exercise of their ingenuity. The income derived from a patent is just as much earned income as any other earned income can possibly be, and I do not think that the Chancellor will be able to resist in principle my suggestion that this income should be treated in that manner.
I know that there may be a technical difficulty in consequence of a legal decision given some years ago that a patent is property, and that the income derived from it is income derived from property, and cannot be estimated as earned income. That decision, however, was not given in connection with any Income Tax law, but, in connection with a case dealing with Excess Profits Duty. Therefore the principle still remains, that income from patents which remain in the hands of the patentee should certainly 1523 be considered as earned income. I hope that the House will not misunderstand me, and will not think that I am appealing on behalf of those people who deal in patents. They are quite a different class of people; their business is to exploit the ingenuity of the original patentee. It is an anomaly that the people who deal in other peoples' patents are able to get the earned income allowance on the profits of their business, whereas the original patentee, who may be keeping his patent in his own hands, and who is letting it out on licence to other people, is deprived of any benefit in that respect. I hope that the Chancellor of the Exchequer will accept this very modest suggestion, because I cannot conceive that it will cost the Treasury very much.
Sir HILTON YOUNGI beg to second the Motion.
I commend this new Clause to the attention of the Chancellor as undoubtedly a step in the right direction as regards putting some common sense into the region of Income Tax law, in which that quality is all too deficient. The whole differentiation between earned income and unearned income is full of anomalies, and there is no region of our taxing law as regards the basis of Income Tax which is more full of injustice and has less relation to any sort of scientific principle. The special value of this interesting new Clause is to show up what kind of anomalies there are in this region of the law. What could be a clearer case on the justice of the matter? Here is the inventor, a man who lives by his brain, and lives in a very precarious manner by his brain, because he might make only one invention in the course of the year, and he might make only one in the course of his life. He has to live on it, and according to the modern methods of finance, the only possible return that he can get from it is in the form of royalties on the sale of the invention. There is in practice no other method by which he can bring home the reward of his invention.
What stands in the decision in Sangster's case? Although I do not question the law of the learned Judge in deciding that case, it is a most astonishing and anomalous decision, because it 1524 was decided that the royalties, which are the only possible way in which the inventor can realise his work, are not earned, but are unearned income. There is no other conceivable way in which the earnings of the invention can be brought home to him. It might probably be argued that some part of the royalties are a return upon property, but how it can possibly be said in common sense that the whole of the royalties are a return upon property or an investment really staggers one to understand. A royalty is not a perpetual investment. A patent has only a limited term of years and it runs out. Further, the life of an invention is very often less than the life of a patent; its success on the market may run for only a year or two, and in the course of that year or two, even in accordance with the strict interpretation of the position, the royalty owner has to replace his capital from income. So on any interpretation, however harsh, the whole of the royalties cannot be looked upon as a return on an investment, and the only common-sense view is that in fact and in substance no part of the royalty is anything but earned income, and the only form of income that can be earned by this most important contribution to the welfare of the commercial and industrial community. Taking this view, we very much hope that the Chancellor will be able to hold out some concession for the benefit of this most deserving class of people.
§ The FINANCIAL SECRETARY to the TREASURY (Mr. Pethick-Lawrence)The hon. Gentleman who moved, and the righ hon. Gentleman who seconded the Motion, certainly put forward a very powerful case on behalf of the new Clause. I am quite prepared to admit that in the way they have represented it there seems to be a great, deal to be said for it. There is another side, however, which presents the matter in a somewhat different light. When a man makes an invention, he has two courses open to him—either to let out the patent rights by royalty, or to sell his patent outright. The Inland Revenue have to take one view or the other. If a man who is in the habit of making inventions sells them outright, the present view of the Inland Revenue is that that is not income for the purposes of the Income Tax law, and therefore the 1525 Revenue do not charge Income Tax on the sales. They treat the sale of the patent outright as a sale of capital, and it escapes Income Tax thereon. If the contention that has been made on behalf of this new Clause were to hold good that practice would have to be changed, and in that case it would be necessary to treat as income any sale outright of a patent. Under the Clause as it stands, the whole advantage will go to the taxpayer, but, if we were to alter the stand which is at present taken, which regards a patent as a piece of capital, clearly the taxpayer could not have it both ways, and he would have to be subject to Income Tax on the sale of his patent outright.
Another difficulty arises. You would get a very curious position in this way. When a patentee sells his patent to another man, that man lets it out on royalties, and I understand that the Mover and Seconder of this Motion do not propose that he shall be subject to the earned income allowance. I think that that would be rather an anomaly, because obviously you are treating it as capital in the one case, and not treating it as capital in another. This matter did come before the Royal Commission on Income Tax. The point put to them was that although royalties received by an author are treated as earned income, royalties paid for the use of a patent are treated as investment income; but in spite of that representation, which was ably put before the Commission, they reported that they saw no reason to recommend any change.
§ Mr. ALBERYWill the hon. Gentleman also tell us the position in the case of an author who sells his work instead of taking royalties on it?
§ Mr. PETHICK-LAWRENCEI think I am right in saying that if an author sells his work the money is treated as income. [Interruption.] If I am wrong I shall be corected, and perhaps I had better verify that statement. [Interruption.] Now I am told that I am right; but I will make quite sure. My impression is that an author who obtains an income either by selling his works outright or from royalties on them is bound to pay Income Tax on it. He is treated worse. An author selling his book outright has to pay Income Tax on the money as income, 1526 but an inventor selling his patent outright does not have to treat the money as income at all; it is regarded as capital. That is the great distinction. The author gains in some ways and the inventor gains in other ways. The Royal Commission, reporting in 1920, saw no reason to recommend any change, and I do not suppose there are any new facts to-day which alter the situation from what it was in 1920; but my right hon. Friend has asked me to say that he will certainly look into this matter, not, of course, with the idea of altering the provisions in the current Bill, because that would not be possible; but he certainly will have this matter thoroughly examined, and if he finds that there is good reason for making any change he will not hesitate to recommend it, unless it involves any large loss of revenue, which he thinks is unlikely. If he finds it desirable to make a change he will not hesitate to make certain proposition in next year's Bill, but as he is at present advised, and taking into account the recommendations of the Royal Commission, he thinks the law had better be left as it is.
§ Mr. ALBERYI am glad to hear that this matter is to be looked into. I cannot see that there is any difference between the royalties which an author gets on a book and the purchase price which he gets for the sale outright, and the sale of an invention and the royalties received for that invention.
§ Sir H. BUCKINGHAMIn view of the statement of the Financial Secretary I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.