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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Tax and accountancy: timing of receipts and expenditure: general principles derived from case law

In relation to almost any business which is carried on over more than one accounting period, questions arise as to whether particular items, whether of receipt or of expenditure, should be attributed to one period or another.

Cases over the years have established that income is earned when goods are provided and services rendered.

In the case Symons v Lord Llewelyn-Davies’ Personal Representatives and Others [1983] 56TC630 (this case is reported as Symons v Weeks and others in Simons Tax Cases) the Revenue disagreed with the method used to recognise income. The taxpayers were architects and, on the insistence of the Revenue, prepared accounts on an earnings basis. They accounted for their long-term contract work in accordance with SSAP9, bringing in an element of profit into the valuation of the long-term contact according to the work stage reached. The stage payments received were carried forward as creditors. The taxpayers explained that the stage payments are frontloaded, the payments for the early stages are out of proportion to the expenditure incurred at those stages, as most of the supervision for the construction work is carried out at later stages. In the final year of the partnership accounts they received £5,100,000 in progress payments but only showed £2,900,000 in work in progress.

The Courts found that the accounts had been correctly drawn up in accordance with proper principles of commercial accountancy. Warner J made two important points.

  • He said that there was no rule of law that where accounts are drawn up on an earnings basis; receipts must be brought into the profit and loss account in the year in which entitlement to them arises.
  • He agreed that neither profits nor losses should be anticipated, and said that in this case the correct application of the accountancy principles avoided anticipating profits that had not yet been earned and ascertained.

Another case involving services is CIR v Gardner, Mountain & D’Ambrumenil Ltd [1947] 29TC69. The company carried on business of underwriting agents. The Courts held that the commissions were earned by the Company in the year that the policies were underwritten. At page 93 Viscount Simon said:

‘In making an assessment to Income Tax [on trade profits] the net result of the transaction, setting expenses on the one side and a figure for remuneration on the other side, ought to appear (as it would appear in a proper system of accountancy) in the same year’s profit and loss account, and that year will be the year when the service was rendered or the goods delivered.’

Johnson v W S Try Ltd [1946] 27TC167 was a case where a building and development business received compensation under the Restriction of Ribbon Development Act. Lord Greene, M. R. looked very closely at when income should be brought into account. He said that it would be misleading to insert a figure in accounts when that figure was hedged round with every kind of contingency and speculation. Instead, at page 185, he said:

‘money must not be taken as being, so to speak, in hand until all the conditions necessary to earn it have been fulfilled.’

He then continued with a discussion of J P Hall & Co. Ltd v CIR 12TC382 which shows that he considered that delivery of goods to have been crucial in that case.

‘It was not until the gear was delivered by the sub-contractors that the right to payment became fixed, and, therefore, a matter which could be treated in the ordinary was as a trade book debt.’