4. Trading Income - TR

Question 1

What are Trading receipts?

Answer 1

ONE - derived from trade (s.7)

TWO - must not be capital (s.96)

Question 2

Higgs v Olivier [1953]

Answer 2

Payment of £15,000 to Olivier by film company so Olivier would not appear in any other film for 18 months

NOT TR – this money wasn’t derived from trade (payment was not in return for services/goods)

This compensation payment case has been limited to the facts (see Terry now - not exercising can be revenue payment)

NB. Such a receipt would now be taxed as income from an employment under the payment for restrictive undertaking provisions in ITEPA 2003 ss.225-226

Question 3

Murray v Goodhews (1976)

Answer 3

Not TR – the money wasn’t derived from payment in return for goods/services, it was paid voluntarily (just related to trade, not actually money from his trade)

Question 4

Greene MR in IRC v British Salmson Aero Engines (1938)

Answer 4

difficulty of determining whether a payment is income or capital:

“in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons”

Question 5

IRC v John Lewis Properties [2003] - the steps for whether TR is income or capital

Answer 5

• Classification of a payment as income or capital depended on the commercial reality of the transaction, the nature of the transaction and the “factual matrix” in which it was set

5 factors:

1. duration of assets disposed of
2. value of asset (relative value)
3. extent of any diminution in value
4. lump sum or series of payments
5. transfer of risk

Question 6

IRC v John Lewis Properties [2003] - the case

Answer 6

• JL got lump sum for selling their right to receive income from the land
• CA held it was capital
• sum was substantial, a single payment, and resulted in simulation in value of JL’s reversionary interests

Question 7

White v Davies [1979]

Answer 7

payments from an EEC grant for undertaking to carry on a farming business in a particular way

• TR
• payments to make good temporary losses so they are income payments
• received money for carrying out business in a particular way and it arose from the carrying of D’s trade

distinguished from Higgs - here taxpayer had a POSITIVE obligation to conduct farming trade in a particular way (not just underacting not to do something) , so impossible to say money didn’t arise from trade of farming

• Higgs just an obligation NOT to do something, no positive obligations too

Question 8

Glenboig Union Fireclay v IRC [1921

Answer 8

COMPENSATION for STERILISATION of an asset = NOT TR

• loss of right to work fireclay under neighbouring land
• CAPITAL SUM
• doesn’t matter that compensation payment was calculated by way of loss of profit
• purpose of using land = impossible now (land is STERILISED) so it is compensation for loss of capital asset
• if land was sold that would be capital so this is an equivalent

Question 9

Burmah Steamship v IRC [1931]

Answer 9

COMPENSATION for TEMPORARY LOSS of asset = TR

• compensation paid for loss profits of owners because repairers over-ran contractual date for completion of work
• payments were TR
• compensation was for use of asset and of loss of profits = both = income nature even though it relates to capital asset because it is use of capital asset

Question 10

Thompson v Magnesium Elektron [1944]

Answer 10

COMPENSATION for RESTRICTION ON ACTIVITY = TR

• taxpayer agrees to restrict his activities as part of his trading arrangements so that payment is a TR

Question 11

Van der Berghs v Clark

Answer 11

LONG contracts

• compensation for ending the contract = CAPITAL receipt
• equivalent of losing a fixed asset of the business
• affected 90% of the business so its like getting rid of the whole business

Question 12

Kelsall Parsons v IRC

Answer 12

SHORT contracts
- one short contract terminated early, compensation = TR
- not like Van Der Berghs because this was:
ONE - merely one contract of many
TWO - short duration

contract was a source of profits, each one was like a trading stock, because they had several of them

• contract doesn’t go to core of the business
• compensation for T stock is same as getting money so compensation is in place of money you’d get from selling stock

Question 13

Sabine v Lookers

Answer 13

Where compensation is given but no loss to income was actually suffered:
= capital reciente

Question 14

London and Thames Haven Oil Wharves v Attwooll

Answer 14

Compensation for injury (rather than total loss of) business asset:

£80,000 = comp to rebuild jetty
£20,000 = lost tanker fees (income)

80k = CAP
20k = TR
- any compensation separately attributable to loss of profits is a TR

Diplock LJ: ‘compensation for failure to receive a sum of money which would have been credited to amount of profits” … is a TR”

Question 15

Barr Crombie v IRC

Answer 15

Even if measure of compensation took remuneration into account, that doesn’t automatically mean TR

• here it is CAP because it was made re: termination of business relations

Question 16

J Lints v HMRC

Answer 16

Compensation is for surrogate for business turnover = TR

(doesn’t matter that solicitors get most business NOT from footfall, because solicitors got compensation and private individuals didn’t get it so it must be for TR)

Question 17

IRC v Cock Russell

Answer 17

enter a notional TR for your closing stock

- value of closing stock to be entered is the LOWER of cost of acquisition or market value

Question 18

Duple Motor Bodies v Ostime

Answer 18

FOR MANUFACTURERS (work in progress)

1) direct cost
2) on cost (which incl. overheads)

can choose either one, as long as consistent

Question 19

Morley v Tattersall

Answer 19

RECOVERABLE = NOT TR
- because at the time you get it, it is not a TR, it is meant to be customer’s money, held on behalf of customer by trader

Question 20

elson v prices tailors

Answer 20

IRRECOVERABLE = “true deposit” = TR at time of receipt

• if no evidence as to whether customer/trader agree it is redeemable or not, then assume it is a true deposit, i.e. irredeemable. i.e. a TR

Question 21

Jay the Jeweller’s

Answer 21

exception to Morley

• held on behalf of customer originally
• BUT statute rendered them irredeemable so they become TR when statute renders it irrecoverable

Question 22

Sharkey v Wernher

Answer 22

if trader disposes of part of his stock in trade for own use he must bring it into his trading account as a TR

• and insert market value of stock in trade at time of disposition

Question 23

Mason v Innes

Answer 23

SHARKEY DOESN’T APPLY TO VOCATION AND PROFESSIONS

General principle of income tax that a man was taxed on the basis of what he receive (not on what he might have received), Sharkey is an EXCEPTION which is confined to the trader with stock-in-trade and accounts on an earning basis

Sharkey does not apply to a professional man who had no stock-in-trade and whose accounts were properly kept on a cash basis

Question 24

Jacgilden v Castle

Answer 24

Re: sharkey

“because it is an exceptional line of authority, I think the court should be slow to extend it” – Plowman J