4. Trading Income - TR Flashcards
What are Trading receipts?
ONE - derived from trade (s.7)
TWO - must not be capital (s.96)
Higgs v Olivier [1953]
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
Murray v Goodhews (1976)
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)
Greene MR in IRC v British Salmson Aero Engines (1938)
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”
IRC v John Lewis Properties [2003] - the steps for whether TR is income or capital
• 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:
- duration of assets disposed of
- value of asset (relative value)
- extent of any diminution in value
- lump sum or series of payments
- transfer of risk
IRC v John Lewis Properties [2003] - the case
- 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
White v Davies [1979]
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
Glenboig Union Fireclay v IRC [1921
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
Burmah Steamship v IRC [1931]
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
Thompson v Magnesium Elektron [1944]
COMPENSATION for RESTRICTION ON ACTIVITY = TR
- taxpayer agrees to restrict his activities as part of his trading arrangements so that payment is a TR
Van der Berghs v Clark
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
Kelsall Parsons v IRC
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
Sabine v Lookers
Where compensation is given but no loss to income was actually suffered:
= capital reciente
London and Thames Haven Oil Wharves v Attwooll
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”
Barr Crombie v IRC
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
J Lints v HMRC
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)
IRC v Cock Russell
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
Duple Motor Bodies v Ostime
FOR MANUFACTURERS (work in progress)
1) direct cost
2) on cost (which incl. overheads)
can choose either one, as long as consistent
Morley v Tattersall
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
elson v prices tailors
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
Jay the Jeweller’s
exception to Morley
- held on behalf of customer originally
- BUT statute rendered them irredeemable so they become TR when statute renders it irrecoverable
Sharkey v Wernher
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
Mason v Innes
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
Jacgilden v Castle
Re: sharkey
“because it is an exceptional line of authority, I think the court should be slow to extend it” – Plowman J
