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HMRC internal manual

Business Income Manual

Receipts: general: anticipation of profits

You may meet claims that a profit shown in the accounts is an ‘anticipation of profit’ and that this should not at that time be taxed. The commonest examples are profits taken on long-term or construction contracts under SSAP9/FRS102 s23. The case often cited in support of such a claim is Willingale v International Commercial Bank Ltd [1978] 52TC242 which concerned the way a bank accounted for bills of exchange. The bank took the profit on the revaluation of bills of exchange that it held on trading account into its profit and loss account. The House of Lords, by a majority, held that that profit should be excluded for tax purposes.

The issue in Willingale is a specialised one and it is unlikely that the decision is of any general application outside the financial sector. The House of Lords subjected the transactions to close analysis; and the majority then concluded that nothing had been ‘realised’ on bills held at the year end (and the minority concluded that something had been).

Profits on long term or construction contracts

The taking of profit on long-term or construction contracts is entirely different. This profit relates by its nature to work that has been done and it has been earned by that work. If the outcome of the contract is able to be assessed with reasonable certainty or estimated reliably the profit that is taken will be on work that has been carried out.

Recognition in the profit and loss account of profit means that profit is realised and not anticipated. There should therefore be no grounds for excluding profits from the tax computation.