Gower Chemicals Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 05 November 2008 |
| Date | 05 November 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr John F Avery Jones CBE
John Brooks, counsel, instructed by Griffith & Miles, chartered accountants, for the Appellant
Colin Williams, HMRC Local Compliance Appeals, for the Respondents
Error or mistake claim - trading profit - some deposits unclaimed by the customer - whether deposits belong to the appellant when received - yes - appeal dismissed
A special commissioner decided that unclaimed deposits received by a company formed part of its trading income as soon as they were received and had to be brought into account for tax purposes.
The taxpayer carried on business selling chemicals supplied to its customers in returnable containers. The general conditions of sale provided for the payment of a "refundable deposit" by a customer in respect of a returnable container which remained the property of the taxpayer at all times. On the return of a container to the taxpayer in good condition and in reasonable time the taxpayer issued a credit note to the customer to the value of the refundable deposit which might be set off against any invoice raised by the taxpayer to that customer within 12 months following its date of issue and thereafter would become void with the taxpayer having no further liability to the customer.
Despite the issue of monthly statements by the taxpayer in which any outstanding amount due to a customer was stated, credits were not taken in respect of all of the containers that had been returned. The evidence was that in about 20 per cent of cases the customer did not claim payment of the credit note. In a small number of cases the customer paid the credit note mistaking it for an invoice. In the year ended 31 July 1999 the sum of the credits not claimed by customers amounted to £87,859. For the year ended 31 July 2000 it was £28,218; it was £64 for the year ended 31 July 2001; and £35,859 for the year ended 31 July 2002.
Those sums had been included in the taxpayer's profit and loss accounts in respect of the relevant years. However, following the decision of the special commissioner in Anise Ltd v Hammond (HMIT)SCD(2003) Sp C 364 an "error or mistake claim" under Finance Act 1998 schedule 18 subsec-or-para 51FA 1998, Sch. 18, para. 51 was made on behalf of the taxpayer by its accountants in respect of those unclaimed credits. The "error or mistake" claims were refused by the Revenue on the grounds that the scope of the taxpayer's trade included the provision of "returnable" containers and "unclaimed deposits" on such containers, which was a normal incident of that trade, i.e. trading income. An appeal against the refusal to allow the "error or mistake" claim was made on the grounds that the unclaimed deposits were not trading income of the taxpayer.
Whether the deposits belonged to the taxpayer on receipt.
The special commissioner (Dr John Avery Jones) (dismissing the appeal) said that the issue turned primarily on the nature of the receipt of the deposit by the taxpayer which knew that about 20 per cent of deposits would not have to be repaid. That made it impossible to say that the taxpayer was merely holding the deposit for the customer. The straightforward analysis was that the deposit was a trading receipt just as the payment for the goods was a trading receipt but with the difference that about 80 per cent of the deposits would have to be repaid, for which it was right to make a provision.
In all the circumstances, the taxpayer's past accounting treatment was correct. The deposit belonged to the taxpayer as soon as it was received and had to be brought into income at that point. The deposit was either a trading receipt from the beginning or not at all, as the special commissioners found in Anise Ltd v Hammond, which, as stated in the agreed facts, was the decision that encouraged the taxpayer to make the error or mistake claim in this appeal. The later timing of the receipt in Jay's the Jewellers Ltd v IR CommrsTAX(1947) 29 TC 274 depended on the statutory provisions of the Pawnbrokers Act under which the pawnbroker had no ownership of the pledge when it was made but after three years a new asset came into existence.
Accordingly, the appeal would be dismissed in principle and the figures left to be agreed to reflect the times when the customer paid the credit note in error.
1. Gower Chemicals Limited appeals against refusal of error or mistake claims for the years ended 31 July 1999, 2000, 2001 and 2002. The Appellant was represented by Mr John Brooks, and the Respondents ("the Revenue") by Mr Colin Williams.
2. There was an agreed statement of facts as follows:
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(2) The trading activity of the Appellant company is the sale of chemicals
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(3) These are supplied to its customers in returnable containers.
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(4) The relationship between the Appellant and its customers are governed by the Appellant's "General Conditions of...
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