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HMRC internal manual

Business Income Manual

Receipts: general: recognition of incomings

The general principle is that receipts which arise in the course of a trade should be recognised for tax purposes at the time that they are recognised in the trader’s own accounts, so long as the accounts are drawn up in accordance with generally accepted accounting practice, subject to any express or implied statutory rule to the contrary. For guidance on the accountancy practice on income recognition, see BIM31080 onwards.

The receipt of money, or the existence of a legal claim to receive money, does not determine whether a receipt has been earned under accountancy principles or for tax purposes. Symons v Lord Llewelyn-Davies’ Personal Representative and Others [1982] 56TC630 shows in particular that whether or not the taxpayer has received money or has a legal claim to it is of little significance if the receipt has not at that stage been earned. Thus payments received in advance of work done and deposits taken as security for the completion of a transaction may well not have been earned and if so should not be recognised as receipts. However the accountancy treatment of, for example, long term contracts or construction contracts is to recognise some income as earned before payment is received.

There may be circumstances where the recognition of incomings in the commercial accounts is on such a conservative basis that it is overridden by tax principles developed by the courts. These situations are only likely to arise where incomings which could have been recognised in the commercial accounts by the application of the accruals concept (that is both earned and matched with current expenditure) are deferred on the grounds of prudence, for example because their realisation is insufficiently certain.

A challenge will not by any means be appropriate in every case where the commercial recognition of potential incomings has been deferred on the grounds that their realisation is insufficiently certain. The courts have acknowledged this. For example, in Johnson v W S Try Ltd [1946] 27TC167 a developer received belated compensation for a refusal of planning permission. The courts held that the compensation, a sum ’hedged around with every contingency and speculation’ (page 182) was not analogous to a trade debt and could not be referred back to the period when planning permission was refused.

But there may be other cases where it may appear that the commercial accounts take an unrealistically conservative view. In worthwhile cases of this nature you should seek advice from an HMRC compliance accountant at an early stage on the following points:

  • whether the accounting treatment is in accordance with GAAP (if not, the starting point for the tax computation should be accounts drawn up on an acceptable basis, see Threlfall v Jones [1993] 66TC77)
  • whether there is an alternative treatment which is in accordance with GAAP and if so what it is
  • whether, and how, the treatment actually adopted can be justified in terms of earning and matching or whether, rather, it is only justified by overriding considerations of prudence (see BIM31000 onwards)
  • how any alternative treatment is to be analysed in terms of these concepts.

If in the light of the accountancy advice you consider that there is a case for arguing that profits should be recognised on a less conservative basis for tax you should put the point to the taxpayer or his agent and debate it accordingly. In doing so, you may cite the decided cases CIR v Gardner Mountain and D’Ambrumenil Ltd [1947] 29TC69; Absalom v Talbot [1944] 26TC166; John Cronk & Sons Ltd v Harrison [1936] 20TC612; Johnson v W S Try Ltd [1946] 27TC167; Isaac Holden & Sons Ltd v CIR [1924] 12TC768; CIR v Newcastle Breweries Ltd [1927] 12TC927 and Severne v Dadswell [1954] 35TC649. You should not argue that these necessarily establish a single tax principle that overrides GAAP. But they remain helpful in illustrating the weight the courts have placed on the need to match receipts with expenditure and recognising income at the point when it is earned.