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10 January 2001
Successful author
We act for a successful author. Many years ago, under a slave contract, all his royalties were transferred to a limited company owned and controlled by himself and his wife. Considerable sums have come into that company over the years and been dealt with as one would expect. The author draws a salary and dividends. We think that the royalties will continue indefinitely at a very significant annual level. Subsequent works completed since the date that the slave contract began have all resulted in further royalties to the company.
We act for a successful author. Many years ago, under a slave contract, all his royalties were transferred to a limited company owned and controlled by himself and his wife. Considerable sums have come into that company over the years and been dealt with as one would expect. The author draws a salary and dividends. We think that the royalties will continue indefinitely at a very significant annual level. Subsequent works completed since the date that the slave contract began have all resulted in further royalties to the company.
Successful author
We act for a successful author. Many years ago, under a slave contract, all his royalties were transferred to a limited company owned and controlled by himself and his wife. Considerable sums have come into that company over the years and been dealt with as one would expect. The author draws a salary and dividends. We think that the royalties will continue indefinitely at a very significant annual level. Subsequent works completed since the date that the slave contract began have all resulted in further royalties to the company.
For one reason or another, it has been suggested that the contract might now be terminated. That would mean that all future royalties would accrue to our client individually. The net present value of those royalties must be considerable.
We are concerned that on the termination of the contract there might be a deemed disposal of this capital value by the company but, if there was, how would the ensuing royalties accruing to our client himself be treated? Or is it simply that instead of the company being assessed to income tax each year, our client would be assessed instead with, therefore, no loss to the Revenue and no chargeable event on the change?
Readers' views would be very much appreciated.
(Query T15,735) – M.
Whether the benefit of the contract is made void by deed or is assigned to the client, there would be a disposal within section 21, Taxation of Chargeable Gains Act 1992, probably at market value as required by sections 17 and 18, in view of the connection. It does not appear that the right to a salary can be regarded as a quid pro quo for having entered into the contract.
To escape the resultant taxes on the chargeable gains resulting from the disposal (and possible liquidation), a partnership could be formed in which the profits below, say, £1 million adhere to the client, with the company becoming entitled (only) to the excess! As regards the dividends, one hopes that those paid to the wife reflect her independent investment in the company, although some Inspectors might seek to allege that the combination of events constituted them the fruit of a settlement by the author (see, for instance, the decision in Mills v Commissioners of Inland Revenue [1974] STC 130).
Moving on to the treatment of future royalties, these seem to represent investment income both to the company and to the client in his capacity of purchaser, quite distinct from his character as slave/author (see Mitchell v Rosay 35 TC 496).
Such income falls within Schedule D, Case III. Of course royalties resulting from future works would represent professional income within Schedule D, Case II, in which the salary was, perhaps, included. – Elder.
The value of a contract depends on its terms, and on whether it can be sold or assigned by either party and, if so, for how much. But a value arising on sale or assignment can only emerge if that actually happens, and it is clear that such a disposal is not contemplated here.
If it is only an employment contract giving the company title to royalties accruing while it lasts, resignation or dismissal will end it without capital gains tax effect; it will just stop running. If that is all there is, simply discontinue the employment.
If, apart from employment terms, the right to existing royalties was transferred for a capital sum, such as the issue of shares, a capital value was established for those particular royalties and the only way out of that part of the contract, aside from buying the rights back, may be to liquidate the company and distribute the assets in kind, which would occasion a computation of the gain on realisation.
If the contract is of the latter mixed variety, the client could still benefit by leaving some of the income to the company, by not buying back the rights initially transferred, as this enables royalties to pass to his wife, in the form of dividends and/or salary. On ending the employment contract, or the employment element thereof, royalties not originally assigned to the company for value will, as the querist suggests, simply revert to the client in place of the company. – Man of Kent.
We act for a successful author. Many years ago, under a slave contract, all his royalties were transferred to a limited company owned and controlled by himself and his wife. Considerable sums have come into that company over the years and been dealt with as one would expect. The author draws a salary and dividends. We think that the royalties will continue indefinitely at a very significant annual level. Subsequent works completed since the date that the slave contract began have all resulted in further royalties to the company.
For one reason or another, it has been suggested that the contract might now be terminated. That would mean that all future royalties would accrue to our client individually. The net present value of those royalties must be considerable.
We are concerned that on the termination of the contract there might be a deemed disposal of this capital value by the company but, if there was, how would the ensuing royalties accruing to our client himself be treated? Or is it simply that instead of the company being assessed to income tax each year, our client would be assessed instead with, therefore, no loss to the Revenue and no chargeable event on the change?
Readers' views would be very much appreciated.
(Query T15,735) – M.
Whether the benefit of the contract is made void by deed or is assigned to the client, there would be a disposal within section 21, Taxation of Chargeable Gains Act 1992, probably at market value as required by sections 17 and 18, in view of the connection. It does not appear that the right to a salary can be regarded as a quid pro quo for having entered into the contract.
To escape the resultant taxes on the chargeable gains resulting from the disposal (and possible liquidation), a partnership could be formed in which the profits below, say, £1 million adhere to the client, with the company becoming entitled (only) to the excess! As regards the dividends, one hopes that those paid to the wife reflect her independent investment in the company, although some Inspectors might seek to allege that the combination of events constituted them the fruit of a settlement by the author (see, for instance, the decision in Mills v Commissioners of Inland Revenue [1974] STC 130).
Moving on to the treatment of future royalties, these seem to represent investment income both to the company and to the client in his capacity of purchaser, quite distinct from his character as slave/author (see Mitchell v Rosay 35 TC 496).
Such income falls within Schedule D, Case III. Of course royalties resulting from future works would represent professional income within Schedule D, Case II, in which the salary was, perhaps, included. – Elder.
The value of a contract depends on its terms, and on whether it can be sold or assigned by either party and, if so, for how much. But a value arising on sale or assignment can only emerge if that actually happens, and it is clear that such a disposal is not contemplated here.
If it is only an employment contract giving the company title to royalties accruing while it lasts, resignation or dismissal will end it without capital gains tax effect; it will just stop running. If that is all there is, simply discontinue the employment.
If, apart from employment terms, the right to existing royalties was transferred for a capital sum, such as the issue of shares, a capital value was established for those particular royalties and the only way out of that part of the contract, aside from buying the rights back, may be to liquidate the company and distribute the assets in kind, which would occasion a computation of the gain on realisation.
If the contract is of the latter mixed variety, the client could still benefit by leaving some of the income to the company, by not buying back the rights initially transferred, as this enables royalties to pass to his wife, in the form of dividends and/or salary. On ending the employment contract, or the employment element thereof, royalties not originally assigned to the company for value will, as the querist suggests, simply revert to the client in place of the company. – Man of Kent.
