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Replies to Queries - 4 - Taxable windfall?

24 October 2001
Issue: 3830 / Categories:

I act for a client who manages property for private landlords, collects rents and passes on the receipt of funds (less commission due to my client). There have been some problems over the past few years when tenants have absconded or left without leaving a forwarding address. If the tenant was in arrears when leaving then there was no great problem, as effectively the private landlord suffered as my client is not obliged to pass on the funds until cleared through the bank account.

I act for a client who manages property for private landlords, collects rents and passes on the receipt of funds (less commission due to my client). There have been some problems over the past few years when tenants have absconded or left without leaving a forwarding address. If the tenant was in arrears when leaving then there was no great problem, as effectively the private landlord suffered as my client is not obliged to pass on the funds until cleared through the bank account.

The main problem that has arisen is where certain tenants were in receipt of housing benefit which normally is paid direct to my client for onward transmission to the landlord after deduction of commission. Unless the absconding/leaving tenant writes direct to the Housing Benefit Office to advise that the lease has ceased, that office continues to pay rents for a period to my client. This is despite the fact that it has been advised by my client that the tenant is no longer in the flat. Credit balances can therefore build up, which the Housing Benefit Office will not always take back.

If these credit balances are written off via the profit and loss account as sundry income, will they be taxable in the hands of my client?

(Query T15,899) – Rental Man.

 

As I see it, the client's position is, unless the contract states otherwise, that he or she acts as an agent to collect the rents on behalf of the landlords, who themselves each have a contract with the tenants in question. Therefore the first point I wish to make is that the housing benefits, collected as rents on behalf of the landlords, do not belong to the client.

The comments made that the Housing Benefit Office unnecessarily continue to pay rent which is not due, does not come as much of a surprise. Something definitely needs to be done nationwide to stop this continuing. The monies concerned have far better uses than the usually overpaid landlord's coffers!

Going back to the excess rents received, as these do not belong to the person concerned, they should also be passed on, less commission, to the landlords concerned and will be shown as taxable rental income in their hands. Therefore from this I am sure it can be seen that if the funds do remain (incorrectly) with the client, as agent, then because of their source and nature, the income concerned falls to be liable to tax. – N.K.

 

Ownership of the excess housing benefit devolves in the following sequence:

(a) It belongs to the council, because it was paid in error. The client should write a cheque in the amount overpaid and send it with an explanatory letter to either the councillor for the ward relevant to the landlord or the property, or to the mayor, or to the council leader. This not only returns the cash but also stimulates someone in high authority to visit censure (or dismissal) on the underling who is so profligate with the ratepayers' money.

(b) Failing the council's right, it belongs to the landlord, to whom it was directed. The client is merely his agent, and should pass the cash to him, less commission of course.

(c) Failing both the above, it is trading income of the client. It does not differ enough from his ordinary traffic, in nature or circumstance, to qualify as a windfall. It clearly arose from his normal business. – Man of Kent.

 

From anecdotal evidence, it is not surprising that the paying office does not wish to be bothered with handling adjustments. The disappearance of the tenant could be more than adequate compensation.

The situation is thus comparable with that met with in businesses when deposits are received in advance but the customer neglects to reclaim them when provisional contracts are not proceeded with.

In Morley v Tattersall 22 TC 51, the well-known firm of bloodstock auctioneers received deposits on terms (originating in 1847) that they would be repaid only against written orders. Perhaps in Victorian times this represented a convenient banking facility for some individuals. At all events, it was held that the obligation to repay remained open, obviating any taxable character when the partners chose to credit themselves with balances unclaimed after six years.

A similar outcome was not obtained in later cases. Jays The Jewellers Ltd v Commissioners of Inland Revenue 29 TC 274 concerned a pawnbroker's obligations to ticket holders whose pledges were sold, while Elson v Prices Tailors Ltd 40 TC 671 concerned a tailor. In the latter case, unclaimed deposits were taxable in the period of receipt.

The question now arises as to what are the accounting principles which regulate the timing of recognition of the credit balances here. Some relevant observations (in the context of authors' advances) appeared in Readers' Forum replies to query T15,673 in Taxation, 14 September 2000 at page 629. – Elder.

Issue: 3830 / Categories:
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