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HMRC internal manual

Savings and Investment Manual

HM Revenue & Customs
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Annual payments: case law: ‘pure income profit’

Case law makes it clear that a payment for goods or services cannot be an annual payment, because it is does not represent pure income profit to the recipient. In the early case of Earl Howe v CIR (7TC289), Scrutton LJ gave the following much-quoted examples (p303).

“It is not all payments made every year from which Income Tax can be deducted. For instance, if a man agrees to pay a motor garage £500 a year for five years for the hire and upkeep of a car, no one suggests the person paying can deduct Income Tax from each yearly payment. So, if he contracted with a butcher for an annual sum to supply all his meat for a year, the annual instalment would not be subject to tax as a whole in the hands of the payee, but only that part of it which was profits.”

The doctrine of pure income profit was developed by the House of Lords in CIR v Corporation of London (as Conservators of Epping Forest), 34TC293, in which annual contributions by the Corporation of London to make good deficiencies in the income of a charity were held to be annual payments. Lord Reid said (p329):

“Case III only deals with payments which are profit income in the hands of the recipient, and if a receipt has to go into a profit and loss account and be set against outgoings it cannot be all profit.”

He stressed, however, that what is important is the quality or nature of the payment, not whether or not it appears in a set of accounts.