Another case has been heard on whether the sale of income is capital or revenue.
A motor vehicle hirer required payments from customers up to one year in advance. Each year the amount of these payments was shown in the accounts as accruals and deferred income, and was included in creditors. In the following year, the company transferred this balance to its profit and loss account as income which was then matched with costs.
In 1993, the company sold its business in an arm’s length deal. In the deal, the company kept the advance payments and included them in the profit and loss account for the period which included the sale. The financial statements disclosed this item as “loss on disposal of fixed assets” less “profit arising on write-back of advance rentals and deferred maintenance”.
Inland Revenue assessed the company on those advance payments as income from trade. The company appealed arguing that they were part of the capital sum paid for the sale of the business. They did not arise from profits of the trade. The consideration for those payments would be provided by the purchaser of the business. The company lost before the Special Commissioners and the High Court.
The court held that whether these payments were capital or revenue depended on whether they arose from the trade. To answer this, it was necessary to look at the source. In this case, the source was normal customers. It was therefore taxable as a trading profit.
What is interesting about this case is that, presumably, a different answer would have resulted if the company had not kept the advance payments but passed them to the acquiring company, and received an appropriate increased payment for acquiring the business. It illustrates the need to be careful in such details when selling a business.
Tapemaze Ltd v Melluish. Ch D [2000]
[2000]