A number of decided cases concerned with the timing of receipts
are considered below.
In CIR v Gardner Mountain and D’Ambrumenil Ltd [1947]
29TC69 the House of Lords held (in the face of accountancy evidence
which the Commissioners accepted) that commission receivable by a
firm of Lloyd's underwriting agents should be recognised in the
year in which all its responsibilities under the relevant contract
were discharged and not in the later year when the commission was
quantified and paid. Particularly noteworthy is Viscount Simon's
approval of the need to match income and expenditure (on page 93).
The decision has been authority for a general rule of tax law that
where services are provided under a contract, receipts for those
services are ‘earned’ when the trader’s
responsibilities under the contract have been discharged, even if
at that time the receipt has not been quantified or payment made.
In Absalom v Talbot [1944] 26TC166 the House of Lords held
that sums left by a builder on (subordinated) loan to purchasers of
houses he had built should be brought to account, at a valuation,
when the houses were sold.
John Cronk & Sons Ltd v Harrison [1936] 20TC612 was
similar case, this time concerning collateral deposits placed by a
house-builder with a building society in support of loans (to the
extent they were in excess of its normal lending ceiling) made by
the society to enable purchasers to buy its houses. The House of
Lords held that the sale proceeds represented by the deposits
should be recognised, at a valuation which allowed for the credit
risk attaching to the deposits, at the time the houses were sold.
The House of Lords accepted, however, that if a valuation was
impracticable recognition should be deferred until the deposits
were released by the building society.
This case illustrates not only the courts' preference for
recognition of trading income when it is earned (and for periods in
which it matches the expenses of earning it) but also their
willingness to accept that in some - extreme - situations doubts
about eventual realisation make that course impracticable. See also
Johnson v W S Try [1946] 27TC167 and
BIM31019 on the latter point.
A number of cases have been concerned with situations where
the consideration for goods or services supplied by a trader in a
period has not been regarded as finally settled at the end of that
period (even though there may be no legal right to further payment
at that point) and additional remuneration has been received some
considerable time later. The courts have held that the remuneration
should be related back to the earlier period when it was earned and
the expenses of doing so were incurred. See Isaac Holden & Sons
Ltd v CIR [1924] 12TC768, CIR v Newcastle Breweries Ltd [1927]
12TC927 and Severne v Dadswell [1954] 35TC649. In these
circumstances the Courts considered that the extra remuneration was
sufficiently analogous to a trade debt to be related back in this
way. Contrast Johnson v Try where the compensation later received
was not an extra payment for work done.
These cases are now most useful as illustrations of the
importance the courts have tended to attach to what we now
recognise as the accruals concept. It must now be doubtful whether
the courts would sanction the reopening of agreed past tax
liabilities. This is particularly so in cases where the incoming
would otherwise fall to be taxed in a current period (as a
constituent of current profits or as a post-cessation receipt);
modern accounting treatment is to recognise the receipt as a
current year item rather than by way of a `prior year
adjustment'.
