Chapter BIM40240

Record NumberBIM40240
Published date22 November 2013

The overpayments category represents one of the most commonly encountered unclaimed balances.

An overpayment, payment by mistake or double payment which relates to an underlying trading transaction is taxable if it arises out of the trade. This is essentially a question of fact to be determined by establishing the scope of the trade and the background to the payment.

In businesses with large customer bases, it is more or less inevitable that there will be mistakes one way or another. At a basic level, just as the loss incurred by giving a customer too much change is allowable as a deduction from trading profits, the surplus when too little change is given is taxable.

Full details of the case law on the tax treatment of overpayments is given below. See BIM40245 for an example.

Pertemps Recruitment Partnership Ltd case

The taxability of sums paid to a trader by mistake was considered in the Upper Tribunal case of Pertemps Recruitment Partnership Ltd v RCC [2011] UKUT 272 (TCC). Pertemps traded as an agency providing either temporary or permanent workers to its customers. Customers were invoiced on a monthly basis and all payments, whether reconciled to invoices or not, were credited directly to Pertemps’ bank account. Pertemps tried to match payments to outstanding customer liabilities. In most instances, Pertemps was able to offset the payment against a liability or repay the customer. In a minority of cases some payments were neither offset nor repaid. At six monthly intervals Pertemps reviewed the unreconciled balances in the sales ledger and transferred any over six months old to a balance sheet account. At the end of the financial year, Pertemps released the balance sheet account to profit and loss. This accounting treatment gave a true and fair view and was in accordance with GAAP. If a customer could show that they had made an overpayment, Pertemps’ policy was to refund even if the amount in question had been transferred to a balance sheet account or been released to profit and loss. There was a factual link between the receipt of the overpayment and the issue, real or in one case imagined, of an invoice for trading services rendered to the customer by Pertemps. There was no separation or immediate identification in its bank accounts of a mistaken overpayment. Some unreconciled receipts were offset against another trading liability of that customer

Pertemps did not know why customers made payments in error, the behavioural drivers behind the...

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