My farming client was in dispute with the Rural Payments agency about their single farm payments over a number of years.
Due to an administrative error on RPA part they had to pay him £60,000 that he wasn't in fact entitled to, due to time deadlines and time limits generally.
This is in effect an ex gratia payment simply because if the RPA wanted to avoid paying the money they had to go through a few hoops most of which they missed.
My question is basically because the money was not generated by the farming business, is it taxable? If it isn't, why isn't it, or more importantly if it is, why is it?
Replies (30)
Please login or register to join the discussion.
If it's been paid in error, then he should really be contacting the RPA to sort it out.
I believe it's a crime to keep money that you know isn't yours - so I'd be taking legal advice on this one!
So he was not paid it because he won the lottery or suffered some personal loss then. He got it because he is in business.
How much did he claim?
he applied for it in the normal way, the RPA missed all kinds of deadlines and had they got it right he would have had the claim refused.
So was he knowingly claiming for more than he was entitled to and hoping they wouldn't notice? (Money laundering alert)
Or did he make a mistake in his claim and only found out once the deadline was passed? (if he claimed it then it's hard to say it's not a business receipt)
Or did he claim the correct amount and they paid him more than he was expecting. (this might point towards your 'windfall' argument)
I think there is an onus on the claimant to 'get it right' as well as the body handling the claims, isn't there?
My point. That you insist on repeatedly missing, is that it is a receipt of the business. It has the business as its source, which makes it a taxable receipt.
I think you are after Anise Ltd and ors v Hammond [2003] STC (SCD) 258, where overpayments from customers were held not to be receipts of the trade. Contrast that with Jay's the Jewellers Ltd v CIR [1947] 29 TC 274. Neither of these might apply to an unincorporated client in 2015, however.
Your client
I am only trying to find a situation that matches, partly because it drops my client right into HR tax liability and of course he has already spent it so doesn't now have the funds to pay the tax!
is a wally then.
I agree with what Portia is saying.
@ Duhamel
And Pertemps?
Pertemps was a UTT decision where overpayments were held to be trading receipts, it therefore overrides the Anise decision. In Jay's the pawn surpluses were held to be trade receipts, but the income only arose when the pawnee could no longer reclaim the surplus.
Yup
And Pertemps?
Pertemps was a UTT decision where overpayments were held to be trading receipts, it therefore overrides the Anise decision. In Jay's the pawn surpluses were held to be trade receipts, but the income only arose when the pawnee could no longer reclaim the surplus.
Even before that it looks like Anise was poor law, as in the Gower Chemicals case. Agree with Portia.
@ Minion
Are you saying that you do not think that the payment should be included as income in the farmer's accounts? Because I disagree.
It certainly sounds like a trading receipt.
There was a legal obligation for the RPA to pay it, and presumably they will have recorded it in their accounts along with the rest of the "normal" payments.
It's not really an overpayment from a customer, as RPA did actually have an obligation to pay this.
So he spent the money in the farming business, and you will not be wanting to claim tax relief for any of that expenditure?
It may be worth providing a few details of exactly what the payment was (incorrectly made) for, just in case there's a slim chance it could be considered to be a capital receipt instead of trading.
Don't forget about an averaging claim too if it pushes him into the higher rate bracket !
Am I to understand you correctly, that you want your client to have received the money in his business and spent it in his business, with the income being non-taxable, but the expenditure (to which the receipt has been applied) being tax-deductible?
What do you think the accounting treatment should be?
No
Surely the source of the money and the use to which the money is put are unconnected?
No they are not. That is the very thing that will make a receipt a taxable receipt.
Your client has not introduced personal funds. He has received funds from a third party, which has swelled the business coffers, and he has applied that money to business purposes. He will want tax relief for what he has spent, but does not want to pay tax on what he has received to fund that spending.
You still have not commented on the accounting treatment.
Relevant guidance is here: http://www.hmrc.gov.uk/manuals/bimmanual/BIM41810.htm and I think CIR v Falkirk Ice Rink is the precedent that says that it is a taxable receipt of the trade..
If it relates to more than one period then there is an argument that it should be spread over that period, but the starting place is what is in the accounts, properly prepared under GAAP.
ex gratia
You have described the payment as "ex gratia". That means
(with reference to payment) done from a sense of moral obligation rather than because of any legal requirement.
That is not the case. The payment was made in error and the law simply prevents the RPA recovering it. But the error was because the RPA originally perceived they had a legal obligation to pay, and it was only paid to your client because they were in the business of farming.
If he feels he's really...
...not entitled to the money then he should approach the RPA about some form of voluntary restitution.
If he doesn't like that idea, he'll have to treat it as a trading receipt.
I'm not sure if there's a statutory rule on payments received in error, but everything points towards it being taxable.
1) It sounds like the RPA will consider this to be normal payment made to your client, and they will have accounted for it as such.
2) Your client has received it by virtue of his existing, undisputed, taxable source of income from RPA
3) There was no gratuitous intent by the RPA.
4) The RPA was legally obliged to pay it.
With this information in mind, I can't imagine it not being taxable.
If HMRC looked into it and asked the RPA what the payment was for, they would shrug their shoulders and say "it's just a normal payment", and they will have accounted for it as so.