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is this taxable?

is this taxable?

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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?

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19th Nov 2015 16:20

Was he paid it because he is a farmer?

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By JimFerd
19th Nov 2015 16:56

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!

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20th Nov 2015 13:31

The RPA messed up on it and reluctantly

had no choice but to pay it to him, simply because of their errors.

 

Yes Portia he got the payment because he was a farmer but wasn't actually entitled to it except for the fact that the RPA didn't get their act together and my clients land agent proved to RPA that they had no choice but to pay him the money, which - had they got things right - he would not have been entitled to.

 

As far as paying it back is concerned there is no facility to pay it back and the land agent has confirmed the position that RPA are correct to have paid him the money, even though had RPA got the timing right he would not have been receiving it.

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20th Nov 2015 13:33

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.

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By Phil Yaboots
20th Nov 2015 13:39

To be fair
Being given £60k of (presumably) public money is like winning the lottery.

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20th Nov 2015 13:44

He got it because

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.

In a normal real world where things are done perfectly (there must be one somewhere!) he would not have had the payment made to him.

I have thought about it being compensation in some way but it isn't really because he isnt being compensated for anything, he is just lucky that he hit on an inefficient employee ate RPA.

 

I supposed that it was along the lines of an unclaimed deposit, where no services had been supplied and the person paying the deposit never came back for a refund, which even though related to the business isn't a supply of goods or services.

 

I am sure in the mists of time i remember something that says that kind of receipt isnt taxable, but can i find it?!!!

 

Nope!

 

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20th Nov 2015 18:05

How much did he claim?

The Minion wrote:

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?

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20th Nov 2015 13:46

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.

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By Duhamel
20th Nov 2015 13:52

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.

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20th Nov 2015 13:58

i am not trying to be difficult

i appreciate that the receipt has come into the business and that it initially came into the business as a receipt, from the RPA point of view that an application was made that they paid out on, but the application was incorrect and should never have been paid out

 

My point is that it is not actually a receipt that the business should have received and it is merely a coincidence that the money coming in started as business receipt but the business should never have have received it, in the first place - maybe like an over balance when someone is tilling up at the end of the day, they have more money in the till than they should have.

 

Assuming that the tilling up has been done correctly they then have money that was not as a result of normal trading activity and therefore is that taxable.

 

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!

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20th Nov 2015 14:01

Your client

The Minion wrote:

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.

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20th Nov 2015 14:04

@ 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.

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By Duhamel
20th Nov 2015 14:12

Yup

Portia Nina Levin wrote:

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.
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20th Nov 2015 14:07

@ 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.

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By JimFerd
20th Nov 2015 14:07

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.

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20th Nov 2015 14:09

What was the money spent on by the way?

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20th Nov 2015 14:15

The RPA did not have a liability to pay

The payment was a mistake and was not corrected in time for it to be repayable by the RPA.

 

This case has gone on over a number of years, as far as what was it spent on - probably financing the losses most farmers seem to be making at the moment, it is certainly not a wild lifestyle.

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20th Nov 2015 15:25

Losses?

The Minion wrote:

The payment was a mistake and was not corrected in time for it to be repayable by the RPA.

 

This case has gone on over a number of years, as far as what was it spent on - probably financing the losses most farmers seem to be making at the moment, it is certainly not a wild lifestyle.

If he has losses you can use these to reduce this taxable profit then :)

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By DJKL
20th Nov 2015 16:43

Are you

The Minion wrote:

The payment was a mistake and was not corrected in time for it to be repayable by the RPA.

 

This case has gone on over a number of years, as far as what was it spent on - probably financing the losses most farmers seem to be making at the moment, it is certainly not a wild lifestyle.

Are you sure the monies were not expended upon cake which has been eaten?

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20th Nov 2015 14:18

So he spent the money in the farming business, and you will not be wanting to claim tax relief for any of that expenditure?

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By JimFerd
20th Nov 2015 14:19

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.

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By JimFerd
20th Nov 2015 15:39

Don't forget about an averaging claim too if it pushes him into the higher rate bracket !

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20th Nov 2015 16:07

OK so

Just in case it isn't clear.

 

I am fully aware that I could have set off losses, i have where possible done that. But if this money is taxable there aren't any allowable losses because they have been eaten up by the RPA money...

 

I am also fully aware that i can average my way out of a HR tax liability, subject to the usual percentages.

 

For the purposes of this discussion lets just assume i have explored all options including year end changes (obviously not for tax purposes), purchase of very expensive tractor in the following year (on tick) to create a loss and possible averaging position etc etc.

 

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20th Nov 2015 16:11

The payment was an over payment of

the annual single farm payment entitlement which can only be income.

 

If it turns out to be capital, and i cant see how it can because they have not surrendered any rights or indeed given anything in exchange for the money, then yes there may be a small reduction for CGT annual allowance but not much else.

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20th Nov 2015 16:33

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?

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20th Nov 2015 16:45

Surely Portia the source of the money and

the use to which the money is put are unconnected?

If i introduce funds in to a business bank account from a personal deposit account to pay a business cost, that doesn't make the funds introduced taxable?

All i am looking at is whether there is any excuse for the money not to be taxable, my fallback position is that i spread the receipt over the years that it relates to (five years worth of single farm payment in one go). Some years fall out of charge to tax (not by much) and other years are what i would term as out of time, but HMRC don't seem to be keen on out of time as a reason at the moment.

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20th Nov 2015 17:36

No

The Minion wrote:

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.

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20th Nov 2015 16:49

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.

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By seawych
20th Nov 2015 17:25

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. 

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20th Nov 2015 17:37

ok so...

for ex gratia read "payment made in error"

 

The accounting treatment would be put the money into other receipts which is exactly where the normal single farm payments go, then when i do the tax computations i add back the receipt as a non taxable receipt, assuming i have a legal reason to do that adjustment.

 

As far as i can see my example still does not make money coming in from a personal account to fund expenses in a business taxable. If it does then what is the purpose of the cash introduced heading in a set of accounts?

 

I cannot in all honesty say that "Hello RPA please can i send you this money back?" is ever going to be a conversation that is going to happen.

 

I have had it with other cases with the RPA where they have paid amounts that didn't quite reconcile with the claimed amount (not by much but different) and the RPA were adamant that they were correct and their stock answer was that they had no facility to accept any repayment of a different amount to that shown by their system.

 

As i said before the money has already gone and been spent on other things.

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20th Nov 2015 17:42

can i just make something completely clear here?

I have no intention at all of just sliding this one in as not taxable without bringing it to the full attention of HMRC, assuming they ever read anything that is submitted, or indeed without a cast iron back up plan regarding the reasons why it isn't taxable.

 

At the moment it is sitting on the taxable side of the fence and will stay there until i get a definitive reason to move it.

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By JimFerd
23rd Nov 2015 09:11

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.

 

 

 

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