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HMRC internal manual

Business Income Manual

Specific receipts: unclaimed balances: receipts that become taxable by operation of law

S5 Limitation Act 1980 (LA 1980), S6 Prescription and Limitation (Scotland) Act 1973, Art4 Limitation (Northern Ireland) Order 1989

Statute of Limitations Some receipts can become taxable by the operation of law. The most common reason for this is the Statute of Limitations.

A trader may have a liability to repay the amount overpaid or to pass on the unclaimed balance if he:

  • receives an overpayment, or
  • holds unclaimed balances for a customer or third party

Accounts prepared under generally accepted accounting principles (GAAP) have to recognise the potential liability. The time at which the liability should be recognised depends on the same accounting principles as those governing other trading receipts. These are summarised at BIM31000 onwards.

The contract between the customer and the trader may specify what happens to any repayment due and the time limits for action. Where the contractual terms do not specify what to do with receipts then the ordinary rules of law including the Statute of Limitations apply.

The time limit imposed on the recovery of the payments by the payer (the limitation period) depends on the legal jurisdiction which applies to the contract. Under most circumstances, the limitation period for actions founded on contract is:

  • England and Wales - six years from the date the cause of action accrues (S5 LA 1980)
  • Scotland - five years from the date on which payment for the goods last supplied or, as the case may be, the services last rendered, became due (S6 Prescription and Limitation (Scotland) Act 1973, as read with Sch1 and 2)
  • Northern Ireland - six years from the date the cause of action accrues (Art4 Limitation (Northern Ireland) Order 1989)

Other sections of the appropriate legislation govern time limits in other circumstances.

The case of Symons v Lord Llewelyn-Davies’ Personal Representative and Others [1982] 56 TC 630 shows that the timing of a receipt for tax purposes depends on the correct application of accountancy principles rather than on legal entitlement to money.

Where the LA 1980 applies, the latest the receipt should be recognised in the accounts is six years after the limitation period starts (see below). The receipt may be recognised earlier if appropriate in the circumstances of the case. The tax treatment follows the accountancy treatment.

In the case of Jay’s - The Jewellers Ltd v CIR [1947] 29 TC 274, the contract between the borrower and the pawnbroker was regulated by the Pawnbrokers Act 1872. No trust arose in relation to the sale of pledges and so the rule applicable to trustees in the LA 1980 (see BIM40220) did not apply. A peculiarity of the Pawnbrokers Act meant that the timing of the payments becoming the property of the taxpayer partly followed time limits set down in the Pawnbrokers Act and partly the normal statutory limitation period.

Atkinson J regarded the effect of the Pawnbrokers Act as bringing into existence, three years after the sale, a new asset which had arisen out of a trade transaction. In other words, statute made the unclaimed balances (which arose from the sale of the pledges in question) taxable trading receipts at that time because it extinguished the borrower’s rights. Atkinson J considered that the unclaimed balances where the Limitation Act barred legal action after six years should be similarly treated, even though that Act does not technically extinguish the debt.

The recognition of the receipt in computing trading profits followed the legal time limits for the money belonging to the taxpayer.

At page 286, Atkinson J in the High Court distinguished Tattersall (see BIM40250) as a case where:

‘The Statute of Limitations had not commenced to run and the Court was dealing merely with the effect of a change in the method in which these sums [the unclaimed balances of sale proceeds] were dealt with in the firm’s books.’

In the case of a trader selling goods or services as a commission agent, it is normally the commission earned which forms the basis of the trader’s profits and which should be taken to profit and loss account as a trading receipt for the period in which it is earned. The normal accounting treatment of any amount received in respect of the sale proceeds (of the goods or services) should be as a balance sheet item, a credit in the ‘creditors’ account. The sale proceeds should however be treated as a trading receipt in any subsequent period when the limitation period expires. This is because the effect of the LA 1980 (or its equivalents in Scotland or Northern Ireland), on the authority of Jay’s, is to bring into existence a new asset arising from the course of the agent’s trade. In such event the liability to creditors can be regarded as extinguished and the amount should be credited to profit and loss.

Where a trader sells goods or provides services, and receives an undue overpayment for them, the excess will be part of the trader’s receipts even if the purchaser may have a claim against him for the undue overpayment. Depending on the facts, the trader may be entitled to make a provision against the possibility of having to repay (see BIM46510). Where accounts are subsequently prepared to add back to profit and loss account the amount of any debt or provision previously allowed, the sum written back is taxable. For example, the sum might be written back on the basis that the trader does not accept that he is liable any longer or he has no intention of meeting any claim.

See BIM40235 for a more detailed example.

Health warning

This page is part of the section of the Business Income Manual on unclaimed balances. You should read the whole section to understand this topic. See the contents page at BIM40200.