When a deposit is received the business will not have carried
out the actions necessary to earn the money. This applies whether
or not the deposit will be forfeited if the transaction is not
carried through. The deposit should be recognised either when the
goods or services are provided or when it is reasonably certain
that no goods or services will ever be provided and the deposit
will be forfeited.
The decision in Elson v Prices Tailors (1963), 40TC671,was
not simply that all deposits and part payments should be recognised
in full when they are received. The judgement contained a
qualification about the obligations arising.
There are a number of tax cases which concern the payment of
damages where there was an interval of time between the event
giving rise to the claim and the eventual determination of the
damages to be paid. It was generally accepted that the damages were
assessable when the claim was settled. These cases include London
and Thames Haven Oil Wharves Ltd v Attwooll (1967), 43TC491,
Roberts v W S Electronics Ltd (1977) 44TC491, and Creed v H & M
Levinson Ltd (1981) 55TC477.
Where the money is awarded entirely in respect of past events
then the full amount of income should be brought in when the
receipt of compensation is “virtually certain” (see
FRS12). In some circumstances the award may contain an amount to
compensate the business for the loss of future profits. If the
business is committed to a certain amount of expenditure for the
future periods it may be appropriate to carry forward some of the
compensation to match this committed expenditure. Accountancy
advice should be sought where this type of income is deferred.
