Analysis
PL Travers (PLT) was the creator of the fictional literary character of Mary Poppins. In 1960 PLT entered into an agreement with Walt Disney which assigned parts of her copyright in the character to him. In this agreement PLT undertook not to exploit her dramatic, TV or radio rights in relation to Mary Poppins without Walt Disney’s consent.
PLT died in April 1996, two years after she had made an agreement with a theatre production company (CML) which related to the grant of an exclusive copyright licence to stage a show based on her books (the 1994 agreement). This agreement provided for the copyright to be assigned to CML in the future (rather than just being licenced) subject to CML satisfying certain criteria. It also referred to PLT’s undertaking with Walt Disney. Walt Disney’s consent was not forthcoming and PLT died before the musical was staged. Her will directed that her literary estate should be held on trust to pay the income to a class of beneficiaries for a period of 80 years and then to distribute the capital between various descendants. The trustees of her will were unaware of the 1994 agreement until 1999. The 1994 agreement was unsatisfactorily drafted from PLT’s point of view and it required amendment for either party to be able to obtain any major financial benefit from it. CML and Walt Disney had reached a deadlock so the trustees intervened and an amended agreement was made in 2004 (the 2004 agreement). The musical was staged in 2004 and further royalties were received as a result.
The trustees treated the royalty payments as capital and therefore they did not consider these payments to be caught by s686 of the Income and Corporation Taxes Act 1988 (ICTA) or its successor provisions ss479 and 480 of the Income Tax Act 2007 (ITA). They paid the basic rate of tax on these royalties rather than the higher rate applicable to trusts.
HMRC stated that the royalties received in the tax years 2004-2009 were taxable at the higher rate of tax as these were income which had been accumulated and so these payments were caught by s686 ICTA.
The first tier tribunal needed to determine:
- Were the royalties to be considered capital or income of the trust;
- If it was decided that the royalties were income then had that income been accumulated? (this had the effect of s686 ICTA applying and a higher rate of tax being charged)
Held:
- (1) Whether copyright royalties payable to the trustees were taxable as income or capital depended on ownership of the copyright on trust law principles. In the absence of English legal authority, the tribunal was persuaded by the principles applied on a series of Scottish cases relating to mineral rights. These cases provided that where an existing mine was put into trust, the receipts received where income which should be paid to the life tenants. However, any payments resulting from the opening of new mines or new rights having been granted by the trustees would be capital receipts properly held for the residuary beneficiaries. In Bow v Ranken [1908] SC 3 the court had held that, in essence, a mineral lease was a sale out of the land. The land was a capital asset and the lease then reduced the capital beneficiary’s interest. It was therefore correct that any proceeds from the lease should belong to the capital beneficiary. This principle could apply equally to the assignment of copyright.
- (2) The application of the principles in Bow meant that the royalties received after the execution of the 2004 agreement were not an accumulation of income by the trustees but an exchange for the parts of PLT’s copyright which had been left to the residuary beneficiaries. As the receipts were capital in nature it followed that s686 ICTA and its successors had no relevance and thus the higher rate of tax was not payable.
- (3) However, by the same analysis the payments of royalties made under the 1994 agreement (those made after the date of PLT’s death but before the execution of the 2004 agreement) were income. These receipts had not been paid out to the life tenants and the result was an accumulation which led to the application of s686 ICTA and a higher rate of tax becoming payable on those receipts.
- (4) Appeal allowed in part.