BIM40250 - Specific receipts: unclaimed balances: holding of sums that belong to someone else
Money that is not a taxable receipt when received can become a taxable receipt in the circumstances described in BIM40230. However, where the unclaimed balance does not change its character, so that it never becomes a taxable receipt, then even if it is taken to the profit and loss account it is not taxable.
The position is illustrated by the decision in Morley v Messrs Tattersall [1938] 22 TC 51. Messrs Tattersall carried on the business of blood stock auctioneers. One of their conditions of sale was that no purchase money would be paid or remittance sent by post without a written order. Over a period of time, considerable sums in unclaimed balances arose. The firm considered itself at all times to be liable to pay such balances.
Under the terms of a new partnership agreement, part of the unclaimed balances was transferred to the credit of the partners. The new deed also provided that any payments that might be claimed and made in respect of the balances should be borne by the partners in proportion to their share of the profits at the date of payment. Until such time as the vendor gave a written order for payment the Statute of Limitations did not apply (because of the particular nature of the circumstances in which the unclaimed balances arose).
It is an important fact in Tattersall that the sums in dispute were not taken to the profit and loss account; rather they were taken to the partners’ capital accounts. This accounting treatment reinforced that what had happened was essentially a private arrangement between the partners. In the Court of Appeal, the Master of the Rolls, Sir Wilfrid Greene, described the arrangement in the following terms at page 63:
‘It was merely a private arrangement between the partners as to the way in which their assets and liabilities should be dealt with in the accounts and had no effect on the legal position at all vis-à-vis the clients.’
The unclaimed balances when received were not taxable receipts, Sir Wilfrid Greene commented at page 65:
‘The money which was received was money which had not got any profit-making quality about it; it was money which, in a business sense, was the client’s money and nobody else’s.’
Sir Wilfrid went on to explain that the unclaimed balances transferred to the credit of the partners were not taxable at pages 65-66:
‘[the Crown’s argument] seems to me, with all respect, to that argument, that it is based on a complete misapprehension of what is meant by a trading receipt in Income Tax law. No case has been cited to us in which anything like that proposition appears. It seems to me that the quality and nature of a receipt for Income Tax purposes is fixed once and for all when it is received. What the partners did in this case, as I have previously said, was to decide among themselves that what they had previously regarded as a liability of the firm they would not, for practical reasons, regard as a liability: but that does not mean that at that moment they imprinted upon some existing asset a quality different from what it possessed before. There was no existing asset at all at that time. All that they did, as I have already pointed out, was to write down a liability item in their balance sheet, and how in the world by effecting that operation, you can be said to have converted a sum received years ago into something which it never was, is a thing which, with all respect, passes my comprehension.’
It is important to recognise that the horses that Messrs Tattersall sold were not their stock in trade. The horses belonged to the vendors for whom Messrs Tattersall were acting as agent. Furthermore, in Tattersall there was no credit to the firm’s profit and loss account, merely a balance sheet credit to the partners.
You should also be aware that the decision in Tattersall has come in for critical comment in the more recent case of Tapemaze Ltd v Melluish [2000] 73 TC 167. Hart J said at page 182 that he:
‘did not find [Tattersall and Jay’s the Jewellers Ltd v CIR [1947] 29 TC 274 (see BIM40230)] of any assistance to me in deciding the present question, which is whether a sum has been correctly accounted for as a profit arising in the year ended 31 July 1994 should be taxed as a profit from a trade…None of the decisions relied upon by the Crown demonstrates that, in the context of accruals accounting, a cash receipt is some way stamped once and for all at the moment of receipt with the character of either having to be or not having to be brought into account in the computation of profit from the trade.’
There is considerable judicial comment on Morley v Tattersall in the recent decision in Pertemps Recruitment Partnership Ltd v RCC [2011] UKUT 272 (TCC)(see BIM40240). The Upper Tribunal was of the opinion that Greene MR’s statement that the character of a receipt was fixed once and for all at the time of receipt was broader than was necessary and required qualification. The Tribunal also said it was incorrect to say that trading receipts were restricted to sums to which a trader had a legal entitlement at the time of receipt. Sums that a trader may eventually be called upon to repay, for example because there had been a mistake, may nonetheless be trade receipts. If such sums are repaid, then the amount repaid will be an allowable deduction.
In Elson v Price Tailors Ltd [1963] 40 TC 671, the taxpayer contended that ‘deposits’ paid by clients when they ordered made-to-measure suits (and which they did not subsequently purchase) were merely payments on account and that there was no legal entitlement to appropriate the balance to their own use.
The court accepted the Crown’s argument that the unclaimed balances were deposits in the true sense of the word and as a result, in a strict legal sense, irrecoverable by the purchaser in default. It did not matter that Price Tailors allowed customers to set the deposit against the purchase of a different, including ‘ready to wear’, suit or granted refunds when asked.
Property in the deposit passed to the company on receipt. The court found that, at the time of receipt, there was an element of profit and loss. There was no dispute that the sums were received in the course of the tailor’s trade. At page 676 Ungoed-Thomas J distinguished Tattersall on the basis that:
‘in these cases the balances in the traders’ hands were not theirs at all but were held for others, and this fact is fundamental to the decisions. The traders had no beneficial interest in them at the relevant time, and although it was because they were traders that they received them, they were not receipts of their trade at all…[the taxpayer] suggested that nevertheless the decisive feature in these cases was the existence of an obligation on the part of the trader to repay the unclaimed balances. But that was an unqualified obligation to repay absolutely, and is only another way of saying that the balances were not the property of the traders but their clients or customers. Both the ownership of the deposit and the absence of any comparable obligation to repay put the case completely outside the essential facts in the Morley and Jay’s cases, and I do not consider that those decisions assist in the decision in this case at all.’
In Price Tailors the unclaimed balances were taxable because:
- there was no ‘unqualified obligation to repay absolutely’
- there was ‘an element of profit and loss’ in the sum when received, and
- property in the money passed on its deposit
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.