Tribunal: Overpayments by customers are taxable
The Tribunal has held that overpayments received by a taxpayer company from occasional customers were taxable income.
The taxpayer company, was a recruitment agency supplying temporary and permanent workers to its customers, who were split into two groups: contract and A-Z. Contract customers entered into a tailored contract with the company, while A-Z customers engaged the company on its standard terms of business, often on a one-off basis. Statements were only issued to companies who owed the company money; not if they had overpaid as some did. Overpayments could also arise when credit notes were issued after payment had been received against the invoice in question.
Where overpayments remained unresolved, they were shown as a liability owed to customers, until released into the profit and loss account. In each of three, of the five, years under appeal the unreconciled payments exceeded £400,000. HMRC said these amounts were liable to corporation tax under TA 1988, s 18(3).
The taxpayer appealed but, after reviewing the evidence, the Tribunal agreed with HMRC that a mistaken payment for services had the same characteristic in the hands of the recipient trader as any other payment. As such the overpayments supplemented the company’s trading profits and were trading receipts.
The company’s appeal was dismissed.