CheckLists.Tax (beta)
E2. Trading receipts
INCOME TAX: TRADING
IDENTIFYING RECEIPTS OF THE TRADE
- Accounting principles not determinative
- "I do not accept that point since the way in which profits are calculated is different for accounting purposes from how they are calculated for tax purposes. The fact that Generally Accepted Accounting Principles lead to a greater deduction from trading income when arriving at profits reported in the company's accounts has never determined how the taxable profits are calculated." (Orsted, §93).
Legislation:
Cases:
HMRC v. Orsted West of Duddon Sands (UK) Limited [2026] UKSC 12;
HMRC manuals:
Commentary:
See also:
- Identity of payer: if a sum is earned it does not matter who pays it
- "In my judgment, the important question is not who pays the gift but whether the estate agents had earned the gift by virtue of work which had been carried out or whether they had deserved the gift. Earning in this sense cannot mean a legal obligation because it is the nature of a gift that there is no legal obligation. If they earned a gift, then the gift is taxable, no matter who pays it. On the other hand, if they deserved a gift then the gift is not taxable, no matter who paid it." (McGowan, 350).
Legislation:
Cases:
McGowan v. Brown [1977] STC 342, Templeman J;
HMRC manuals:
Commentary:
See also:
- Whether sum is in respect of services
Whose perspective?
- Look at the recipient's perspective, but that will involve considering the payer's perspective:
"...you have to look at the point of view of the person who receives, to see whether he receives it in respect of his services, if it is a question of an office, and in respect of his trade, if it is a question of trade, and so on. You have to look at his point of view to see whether he receives it in respect of those considerations. That is perfectly true. But when you look at that question from what is described as the point of view of the recipient, that sends you back again, looking, for that purpose, to the point of view of the payer: not from the point of view of compellability or liability, but from the point of view of a person inquiring what is this payment for; and you have to see whether the maker of the payment makes it for the services and the receiver receives it for the services." (Chibbett v. Robinson).
Legislation:
Cases:
Chibbett v. Robinson (1924) 9 TC 48;
HMRC manuals:
Commentary:
See also:
Rebates
- Rebates
Severne v. Dadswell
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
Voluntary receipts
- Voluntary addition to price for services/goods (trading receipt)
General position
- A voluntary addition to the price paid for goods/services is a trading receipt.
- "If the remuneration received, although through an indirect method, corresponds to an increase in price then there is a good deal of ground in common between Australia (Commonwealth) Comr of Taxation v Squatting Investment Co Ltd and the present case." (McGowan at 849).
- A strong indication that the payment is an addition to the price is whether those services/goods are considered to have been adequately remunerated already or not.
Examples
- Squatting Investment Co Ltd - Wool compulsorily acquired at prices fixed by regulations. The wool was subsequently sold at a large profit. The purchaser voluntarily distributed the profit to the wool growers in addition to the price they already received. Held: this was an addition to the price.
- Severne v. Dadswell - During the war, millers were required to buy and sell at price which made willing uneconomic. The Minister made an ex gratia payment to millers to help make up the loss. Held: taxable receipt as directly referable to the work which had been carried out.
- McGowan v. Brown - Estate agent worked for inadequate remuneration on the purchase of a plot in the expectation of getting the work of selling the developed plots. When that opportunity did not arise, an ex gratia payment was made. Held: the further payment was earned through the earlier work.
Legislation:
Cases:
Australia (Commonwealth) Comr of Taxation v Squatting Investment Co Ltd;
Severne v. Dadswell;
McGowan v. Brown [1977] STC 342, Templeman J;
HMRC manuals:
Commentary:
See also:
- Voluntary compensation for failure to receive profit earning opportunity (trading receipt)
- A payment received to compensate for the loss of a profit making opportunity (itself intended to be in recognition of earlier work being under-remunerated) was taxable in McGowan v. Brown.
- There was a custom that an estate agent would receive low remuneration for negotiating the purchase of a site for development on the basis that the same estate agent would get the more lucrative work of selling the developed properties.
- The site-buyer sold it on before developing it and the subsequent buyer made an ex gratia payment to the estate agent in response to protests from the estate agent.
- Held: taxable. It was paid because the estate agent had been inadequately remunerated for the earlier work and had a moral claim to compensation when not appointed for the more lucrative work.
Legislation:
Cases:
McGowan v. Brown [1977] STC 342, Templeman J;
HMRC manuals:
Commentary:
See also:
- Voluntary payment on termination/partial termination of trading relationship not referable to specific work
General principles
- A voluntary payment on termination of a trading relationship has been held not taxable in circumstances where it was unsolicited and not referable to any specific past work or loss of a future profit-making opportunity.
- Distinction is whether the payment was 'earned' or simply 'deserved' which depends on "whether the gift can be referred to the work of the recipient or whether it can be referred to the conduct of the recipient" (McGowan at 349).
- Relevant factors (see McGowan at 348 - 349):
(1) Whether the payment was unexpected and unsolicited - if so, "would normally follow that it does not relate to any particular work" (McGowan, 349).
- "a trader who feels that he has worked and earned something will not feel any difficulty in soliciting payment" (McGowan, 349).
(2) Whether the business connection has ceased.
(3) Whether the payment can be attributed to specific past work carried out.
- The fact that that work was/was not fully paid for may indicate the answer.
- A payment made to recognise services provided over a long period is an indication that it recognises conduct rather than specific work.
(4) Whether the payment reflects a 'moral claim' for work done that was not paid for or not adequately paid for - this will usually also mean the gift is not unexpected.
(5) Is made as a "token of regret at the termination of a business association"/to acknowledge that termination of business association will not be welcome for financial reasons.
(6) Whether the business connection might be renewed in future.
- "If the recipient has been paid in full for past work, but the person making the gift wishes to acknowledge the past conduct of the recipient or to give some token of regret at the termination of a business association and to acknowledge the fact that this termination of business association will not be entirely welcome to the recipient either for financial or other reasons, the payment is not earned but it is deserved. It is not taxable." (McGowan, 349).
Examples of unsolicited ex gratia payments
- Chibbett v. Robinson - payment to a firm that managed a company upon termination/liquidation out of the company's 'abundant prosperity' was a "testimonial for what they had done in the past in their office which has now terminated".
- Walker v. Carnaby - Auditors received an unsolicited ex gratia payment when the company decided to change auditors.
Held: not taxable as not attributable to work done in the past (properly remunerated) and not compensation for any work to which they were entitled in the future.
- In McGowan: "In the old days a railwayman earned £5 a week and he was thought to deserve a gold watch when he retired after 30 years' service. Similarly in these days an auditor earns his annual fees and charges, but nevertheless may deserve a gift when the auditor ceases to be appointed an auditor after serving the company for a number of years."
- Simpson v. John Reynolds & Co - Insurance broker received an unsolicited ex gratia payment when its services became redundant.
Held: not taxable as although it was in recognition of past services it was not attributable to any specific work the broker had carried out.
- Murray v. Goodhews - Brewery company terminated some, but not all, of the tenancies of T. Ex gratia payment was made to acknowledge friendly relations and maintain goodwill and image in the brewing industry.
Held: not taxable as the payment was wholly unexpected and unsolicited and not attributable to any specific work done in the past.
Legislation:
Cases:
Chibbett v. Robinson (1924) 9 TC 48;
Walker v. Carnaby
Simpson v. John Reynolds & Co
Murray v. Goodhews
McGowan v. Brown [1977] STC 342, Templeman J;
HMRC manuals:
Commentary:
See also:
CAPITAL OR INCOME
- Sum received for the surrender/loss of a capital asset or enduring benefit for the trade is capital
- The principles relating to whether a sum received is capital are equivalent to the principles determining whether expenditure is capital.
- In Van Den Berghs, HoL referred to the authorities on capital expenditure and, in particular, Lord Cave's statement in Helsby Cables that "when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, … there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital".
- It was noted that "if the numerous decisions are examined and classified, they will be found to exhibit a satisfactory measure of consistency with Lord Cave's principle of discrimination" (Van Den Berghs at 430).
Legislation:
Cases: Van Den Berghs Limited v. Clark (1935) 19 TC 390 (HoL);
HMRC manuals:
Commentary:
See also:
- Destruction or exhaustion of a source of profit
- "Only where compensation is paid for the destruction or exhaustion of a source of profit that it is capable of constituting capital" (Able, §12).
- Lump sum paid for the destruction of the profit-earning capacity of a capital asset (thereby diminishing its value) is a capital receipt (Able, §9).
- Consideration receive for the once and for all realisation of the capital value of an asset is capable of being a capital receipt even if the asset remains in existence if its capacity as a source of profit is exhausted (Able, §§9 - 10).
- If an asset has a number of potential ways to produce income, the capital value reflects each source and destruction of one source may give rise to a capital receipt (Able, §10).
- E.g. in McClure, a payment to deposit subsoil on land was capital because that could only happen once, even though the land was retained and had other uses.
- "In McClure the taxpayer retained his interest in his land, part of which was adjacent to a motorway. He continued to receive rent from his agricultural tenant. But once sub-soil from the construction of the motorway had been deposited on the land, it could not be used again for dumping. One of the sources of income derived from the land had been exhausted, although it was still a source of agricultural rent. Compensation could be characterised as a once and for all realisation of that proportion of the capital value of the land which reflected the source of profit from dumping waste: it was a capital receipt." (Able, §11).
- In Able, temporary interruption to use of a landfill site during which market conditions changed meaning its potential as a landfill site could not be fulfilled was not the exhaustion of a source of profit - there was no permanent impact, market conditions changed (§14).
Temporary loss of use
- Compensation for temporary loss of use of a capital asset generally income (Able, §15).
Legislation:
Cases:
McClure v Petre [1988] 1 WLR 1386;
Able (UK) Ltd v. HMRC [2007] EWCA Civ 1207, Moses, Buxton, Lawrence Collins LJJ;
HMRC manuals:
Commentary:
See also:
- Compensation for the termination of structural contract is capital
- A payment received to consent to the termination of a contract that relates to the whole structure of T's profit-making apparatus is a capital sum.
- "The three agreements which the Appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the Appellants' profit-making apparatus. They regulated the Appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a trader's activities can be regarded as an income disbursement or an income receipt." (Van Den Berghs).
Legislation:
Cases: Van Den Berghs Limited v. Clark (1935) 19 TC 390 (HoL);
HMRC manuals:
Commentary:
See also:
- Lump sum to replace periodic receipts
-Sale of right to future dividends for lump sum would be capital:
- "Prima facie those moneys, being the price of the sale by Shurltrust of its right to the future dividends of Ballinamore, constitute capital not income." (McGuckian)
- HMRC accept that where a lump sum is provided in return for giving up all future rights to payment under an insurance policy, the lump sum will usually be capital (IPTM6140).
Legislation:
Cases:
IRC v. McGuckian [1997] STC 908 (HoL);
HMRC manuals: IPTM6140 - Sickness disability and unemployment insurance: lump sums to give up future rights to payments;
Commentary:
See also:
- Employee related examples
- Bensons Hosiery it was common ground that a payment received to waive a director's service contract was capital.
- Contrast with BW Noble Ltd: removal of a single undesirable director was revenue in BW Noble Ltd (employees considered temporary).
Legislation:
Cases:
BW Noble Ltd v. Mitchell (1927) 11 TC 372 (CoA);
O’Brien v Bensons Hosiery (Holdings) Ltd [1980] AC 562 (HoL);
HMRC manuals:
Commentary:
See also:
- Property related receipts
Capital
- Sterilisation of a capital asset by preventing T extracting natural resources (Glenboig Union Fireclay).
Revenue
- Compensation for rent on lease being increased by more than it should have been due to negligence of estate agent (Donald Fisher).
Legislation:
Cases:
Glenboig Union Fireclay Co Ltd v. IRC (1922) 12 TC 427 (HoL);
Donald Fisher (Ealing) Ltd v. Spencer [1989] STC 256 (CoA);
HMRC manuals:
Commentary:
See also: