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The taxpayer company carried on business as a recruitment agency, providing temporary and permanent workers to customers who were invoiced on a regular basis. All payments, including unreconciled ones, were made to the same bank account.
Customers occasionally overpaid and, where they remained unresolved, the overpayments were shown as a liability owed to customers, until released into the profit and loss account.
The taxpayer claimed that such payments were not trading receipts because they had been made in error. HMRC said the payments were trading income and liable to corporation tax.
The First-tier Tribunal supported HMRC; the taxpayer appealed to the Upper Tribunal (Tax and Chancery Chamber), contending that the First-tier Tribunal had erred in law.
The company argued that its circumstances fell within those in Morley v Tattersall 22 TC 51: a payment could not be a trading receipt unless the trader had a legal entitlement to receive it at that time.
The Upper Tribunal did not accept the taxpayer's arguments. First, nothing in TA 1988, s 18(1)(a)(ii) required a taxpayer to be legally entitled to receipts making up the profits, nor had it been stated in Morley that such a requirement existed.
Furthermore, the fact a customer had made an overpayment, and therefore had a restitutionary claim to repayment of that sum, did not mean the taxpayer was not legally entitled to receive it.
On the contrary, the taxpayer was legally entitled to receive and keep the money unless a claim for repayment was made. That was why the taxpayer had done nothing wrong in keeping the money mistakenly paid by its customers.
The payments were trading receipts, and the taxpayer company’s appeal was dismissed.
