Lump sum compensation

Lump sum compensation

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For the last 12 years, my client has been designing a successful range of novelty teapots. His one-man company uses the designs without payment, and has the pots made in China, then sells them through various UK stores. 3 years ago, a retailer 'nicked' the most popular design ideas and launched its own range of tea-pots. The retailer has now agreed to pay compensation of £650K to the individual. How should this be dealt with? Is it taxable on the individual as a gain, or should he pass it to the company to be taxed as part of its trading income?
sjd

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By AnonymousUser
30th Jul 2008 19:27

Not really
If the income is royalties or compensation for royalties that would have been received, it is taxable on the individual as income even if he has never traded under what we used to call Sch D Case VI but now call ITA 2005 Chapter 2.

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By User deleted
30th Jul 2008 17:04

Trading?
Does it help that the individual has never traded?

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By gilderda
29th Jul 2008 16:47

It's the character of the payment...

...in the hands of the recipient that determines whether or not it's a trading receipt.

If it's a payment made to compensate the trader for a loss of profits (caused by the "theft" of the designs), then I'd imagine you'd have a hard job convincing the Revenue that it isn't a trading receipt (have a look at Lang v Rice, or Donald Fisher (Ealing) v Spencer for some idea of the arguments involved)

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By AnonymousUser
29th Jul 2008 14:08

Apparently...
.. the individual has retained full ownership of the designright throughout and has allowed his company royalty-free use of it.

The compensation from the retailer is apparently for infringement of the individual's designright and is therefore properly taxable on the individual, not on his company.

The compensation may well be regarded as being in respect of the royalties the individual would have received from the retailer if there had been a formal licence agreement in place between them. In that case, the compensation is likely to be taxable on the individual as income, notwithstanding that it is received as a lump sum.

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