The Revenue Commissioners and Wen-Plast (Research and Development) Limited ([2007] IEHC 66)

Facts:

The taxpayer company invented a fire-resistant, hygienic door set, which included a fire resistant strip encased in plastic material. The inventive aspect was the encasing of the fire resistant strip in a specific type of door frame made of cured plastic materials.

Prior to this, two separate door sets were required for pharmaceutical “clean rooms”, one to provide fire-resisting capabilities, which could not meet the required hygiene standards and the second to provide the required hygienic capabilities.

The invention required finding a combination of a fire resistant material and a plastic material that could incorporate it that gave the new door set the seamless quality specifically required to meet hygienic standards.

Issue

Whether the invention of the fire-resistant, hygienic door set, which included a fire resistant strip encased a plastic material “involved radical innovation” within the meaning of s.141 TCA 1997.

Decision:

This case deals with the meaning of “involved radical innovation” in the exemption for distributions paid out of income from qualifying patents in s.141(5)(d) TCA 1997.

S.141(5)(d) TCA 1997 must be read in the context ofs.141 as a whole and s. 141 has to be read in conjunction with s.234 TCA 1997. Section 234 deals with the treatment of certain income derived from patent royalties for income tax and corporation tax purposes, whereas s. 141 deals with distributions out of income from patent royalties, for example, distributions by a company to its shareholders by way of dividend.

In general, if a distribution is made out of specified income, i.e. income from a qualifying patent which is not received from a connected party, then to the extent that the income is met with corresponding research and development expenditure, it is not taxable. If the company is not involved in R&D or does not incur sufficient R&D, then there is an alternative means of exempting the distribution-if a distribution is made from income from a qualifying patent “which (I)involved radical innovation, and (II) was patented for bonafide commercial reasons and not primarily for the purpose of avoiding liability to taxation”, then Revenue will make a determination whether the distributions are made out of disregarded income and hence not taxable. The key issue in this case revolved around the meaning of the “involved radical innovation”. According to the judgement, there are three stages in the process which leads to a qualifying patent, based on s.234 TCA 1997, first the process leading to the invention, the second being the actual invention and the third being the patenting of the invention.

Revenue argued that the radical innovation must have occurred in the processes leading to the invention and as the individual parts of the invention would not be considered “radical”, the distribution would be taxable; whereas the taxpayer argued that the invention itself must have involved radical innovation, which the invention in this case clearly involved.

It is quite clear from the wording in the legislation that the wording “involved radical innovation” refers to the invention – as it is beyond doubt that part II of the subsection “was patented for bona fide...” refers to the invention. While Revenue was basing their argument on the use of the past tense “involved”, I think their construction brings the wording to the absolute limit, if it even stays at that limit and doesn't fall over the edge, whereas the taxpayer's construction gives the ordinary everyday meaning to the words.

The Court agreed with the decision of the Special Commissioners which found in favour of the taxpayer, i.e. “it is not necessary that radical innovation is capable of being demonstrated as part of the process leading to a patent but that it is sufficient that a combination of known technology could, and does in the instant case, result in an invention which involved radical innovation.”

This case brought thoughts, construction and arguments to the words “involved radical innovation” that very few would have considered before this. Finally, it is worth noting that s.141 TCA 1997 has gone through various changes during the years, not least with the consolidation of the various Tax Acts in 1997, and this has resulted in a section which may require some adjustment to ensure clarity, not least in the process by which Revenue can make a determination in respect of inventions which “involved radical innovation”.