BIM40260 - Receipts: unclaimed balances: trade debts not paid: example

D is a distributor. D obtains its supplies from S. D has a large customer C. Normally on receiving an order from C, D would obtain the goods from S and then supply them to C. But arrangements are put into force whereby C orders from D but S supplies the goods direct to C, making use of D’s delivery notes, of which it has a stock. The arrangements are that D then invoices C and S invoices D. However S is not very efficient at invoicing D. D reminds S that invoices are absent in respect of supplies made to C. The amount involved is £100,000. After some time D decides that there is so little likelihood that S will now invoice it for supplies made to C that D could write the amount back. This results in D including an exceptional item in its accounts ‘debt to supplier not collected’. D excludes the sum from its computation of taxable profit.

The £100,000 constitutes a legally enforceable debt due from D to S. Just because S neglected to invoice D for supplying the goods direct to C does not mean that that S has no legally enforceable debt against D in respect of supplying those goods. That the debts become statute barred after 6 years does not alter their original status as enforceable debts.

Because the debt has not been formally released, ICTA88/S94 does not apply. Following our opinion of the decision in the British Mexican Petroleum (see BIM40265) any sum credited to profit and loss is taxable under general principles.

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This page is part of the chapter of the Business Income Manual on unclaimed balances. You should read the whole section to understand this topic. To see the contents please press the menu button below.