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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Tax and accountancy: recognition of deposits and compensation


When a deposit is received the business will not have carried out the actions necessary to earn the money. This applies whether or not the deposit will be forfeited if the transaction is not carried through. The deposit should be recognised either when the goods or services are provided or when it is reasonably certain that no goods or services will ever be provided and the deposit will be forfeited.

The decision in Elson v Prices Tailors [1963] 40TC671 was not simply that all deposits and part payments should be recognised in full when they are received. The judgment contained a qualification about the obligations arising.



There are a number of tax cases which concern the payment of damages where there was an interval of time between the event giving rise to the claim and the eventual determination of the damages to be paid. It was generally accepted that the damages were assessable when the claim was settled. These cases include London and Thames Haven Oil Wharves Ltd v Attwooll [1967] 43TC491, Roberts v W S Electronics Ltd [1977] 44TC491, and Creed v H & M Levinson Ltd [1981] 55TC477.

Where the money is awarded entirely in respect of past events then the full amount of income should be brought in when the receipt of compensation is ‘virtually certain’. In some circumstances the award may contain an amount to compensate the business for the loss of future profits. If the business is committed to a certain amount of expenditure for the future periods it may be appropriate to carry forward some of the compensation to match this committed expenditure. Advice from an HMRC compliance accountant should be sought where this type of income is deferred.