Tapemaze Ltd v Melluish [2000], 73TC167.The company carried on a
business of hiring assets and received payments in advance. In its
accounts the payments in advance which related to the following
period were shown on the balance sheet as deferred income. They
would then be released to the profit & loss account as turnover
in the following period, and matched with the related costs.
It sold its business, including the majority of the assets
but retained the cash in hand and its bank account. It therefore
retained payments in advance which related to the period after the
date of sale. This sum then formed part of an exceptional item in
the profit & loss account for the accounting period of sale.
The report from the Board of Inland Revenue’s Advisory
Accountant explained the accountancy. The sum was not income
arising from the sale, it was a recognition that income which had
been carried forward as deferred income would no longer need to be
carried forward as it no longer had a liability to perform under
the hire contracts. The appropriate accounting treatment was to
recognise the profits at that point.
Hart, J concluded “
In my judgment, both the beginning and the end
of the inquiry should be to consider the source of the profit which
has been properly recognised as income in these
accounts." In my judgment, both the beginning and the
end of the inquiry should be to consider the source of the profit
which has been properly recognised as income in these
accounts.” He considered that the relevant question in the
context of accruals accounting was whether the trade was the source
of the profit shown in the accounts, and not whether the cash, when
received, was a trade receipt.
In this case the correct accountancy was clearly explained
and the question of law was whether the income was trading income
which arose in that year. There was a profit of a revenue nature,
shown in accounts which complied with generally accepted accounting
practice, and the source of those profits was the trade. It was
therefore appropriate to include those profits within the amount of
profits or gains which had arisen from the trade for the year.
