Pertemps Recruitment Partnership Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 May 2010 |
| Neutral Citation | [2010] UKFTT 218 (TC) |
| Date | 13 May 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 218 (TC)
Nicholas Aleksander (Chairman), Philip Gillett (Member)
Jonathan Schwartz, counsel, instructed by Grant Thornton UK LLP for the Appellant
Elizabeth Wilson, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Corporation tax - trading profits - mistake - taxpayer supplying recruitment services to customers - customers making payments by mistake - unclaimed amounts transferred to balance sheet account and released to profit and loss account at financial year end - mistaken payments constituting trading receipts accruing or arising from trade for tax purposes - taxpayer's appeal dismissed
The First-tier Tribunal decided that overpayments made by customers to a taxpayer company by mistake which were paid into the company's bank account and used to meet expenses constituted trading receipts accruing or arising from trade for tax purposes.
The taxpayer company carried on business as a recruitment agency. Unreconciled overpayments by customers were paid into its bank account and used to meet the taxpayer company's expenses. Unreconciled balances in the sales ledger which were more than six months old were transferred to a balance sheet account. At the end of each financial year, the balance was released to the taxpayer's profit and loss account as part of its year-end procedures. The accounts showed a true and fair view and were prepared in accordance with generally accepted accounting practice.
HMRC considered that the overpayments constituted receipts of the taxpayer's trade so that the amounts released to the profit and loss account each year fell to be treated as taxable profits. The taxpayer appealed to the First-tier Tribunal, contending that a receipt could only be within the scope of a trade if there was some legal nexus or entitlement linking the receipt to the trade and a payment made in error lacked that legal entitlement needed to link it to a trade. Furthermore, since the customer's right to claim repayment of any overpayment would never be time-barred, the overpayments would never become trading receipts.
Whether the mistaken payments formed part of the taxpayer's receipts accruing or arising from its trade for tax purposes.
The First-tier Tribunal (Nicholas Aleksander) (dismissing the appeal) said that it was clear that the overpayments received by the taxpayer had arisen from its trading activities. The payments were made by customers in the mistaken belief that they owed the taxpayer money for services supplied to them in the course of the taxpayer's trade. The taxpayer did not segregate the mistaken payments from its other receipts and treated the mistaken payments as its own money. The overpayments were therefore receipts arising or accruing from its trade. The fact that the payments were unilateral or that customers might have a claim against the taxpayer for the return of the money did not prevent the payments from being treated as trading profits. Accordingly, the amounts released to the profit and loss account for the relevant accounting periods fell to be treated as taxable profits.
It was not in dispute that the taxpayer's accounts showed a true and fair view and were prepared in accordance with generally accepted accounting practice. As the overpayments were receipts of the taxpayer's trade within Sch. D, Case I, the amounts released to the profit and loss account each year fell to be treated as taxable profits.
1. Pertemps is a UK incorporated and resident company. The issue in the case is whether sums of money mistakenly paid by customers to the Appellant ("Pertemps"), and not repaid, were liable to corporation tax under Income and Corporation Taxes Act 1988 section 18 subsec-or-para 3section 18(3)Income and Corporation Taxes Act 1988 ("ICTA"). Pertemps say they are not. The appeal is against (a) the refusal of error and mistake claims made pursuant to Finance Act 1998 schedule 18 subsec-or-para 51paragraph 51, Schedule 18, Finance Act 1998 for each of the accounting periods ended 31 December 1999, 2000, 2001 and 2002, and (b) an amendment to Pertemps' corporation tax return for the accounting period ended 31 December 2003 pursuant to Finance Act 1998 schedule 18 subsec-or-para 34paragraph 34(4), Schedule 18, Finance Act 1998.
2. Pertemps was represented by Jonathan Schwartz, and HMRC by Elizabeth Wilson. We had a witness statement of, and heard evidence from, Clive Hamilton, an accountant employed by Pertemps. In addition we had bundles of documents, including a statement of facts not in dispute.
3. The primary facts were not in dispute before us and were largely agreed. Pertemps and HMRC have agreed that the appeal should be determined by reference to sample balances in the accounting period ended 31 December 2003 selected by HMRC during their enquiry into the subject matter of the appeal. In our view nothing turns on the individual details of transactions.
4. We find the following to be the relevant primary facts.
5. The business of Pertemps is the operation of staff agencies - namely a recruitment agency providing either temporary or permanent workers to its customers. Where Pertemps provides a temporary worker, it pays the worker, and recharges the customer for the worker's costs plus a management fee. Where Pertemps provides help to enable a customer to engage a permanent worker, it charges the customer a recruitment fee. Pertemps invoices its customers in respect of these services.
6. Pertemps customers are split into two groups - "contract" customers and "A-Z" customers. Contract customers enter into a contract with Pertemps for the supply of temporary and/or permanent workers. The contracts are specific to the particular customer, and run for a period of between two and five years. A-Z customers do not have tailored contracts, and instead engage Pertemps on its standard terms of business. The typical length of an assignment for an A-Z customer is 12 weeks. Relationships with A-Z customers are often "one off" and last for a short period of time. For the year ended 31 December 2003, income from A-Z customers made up 45% of Pertemps' turnover, and income from contract customers made up 55% of turnover.
7. Contract customers are sent a spreadsheet by e-mail each week detailing all outstanding invoices. The customer reviews this spreadsheet and reconciles it with its own records. The customer then either authorises payment according to the spreadsheet or disputes the amounts shown as due. Pertemps credit control department is in very regular contact with contract customers, and if a payment is not received by the due date, the customer is immediately telephoned. Any differences between Pertemps' records and those of the customer are reconciled and any disputes over the quality of service are referred to the relevant individual in Pertemps for action. If a credit note is issued, it will show up on the next spreadsheet sent to the customer. Payments are normally withheld by customers where there are amounts in dispute and these amounts are not released for payment until the matter is resolved.
8. Most A-Z customers are billed on a weekly basis. Statements for these customers are generated each month showing outstanding invoices and any unallocated payments (statements are also provided on request). In some cases these statements are sent electronically directly to the customer. However the majority are transmitted electronically to an outsourcing firm engaged by Pertemps. The outsourcing firm prints out the statements and posts them to the customers. Statements are not sent to customers if they have no net balance owing to Pertemps, namely if the balance is zero, or if there is a credit balance in favour of the customer. In consequence if A-Z customers have made overpayments in error, there are circumstances in which Pertemps may never inform them of that fact.
9. A-Z customers are telephoned by Pertemps' credit control department within two days of an invoice becoming overdue. Credit notes may be issued to A-Z customers for a number of reasons, mainly disputes over amounts charged or hours worked. Where there is a disagreement, the customer will normally withhold payment either for the full liability on the account, or for the disputed amount. Once the disagreement is resolved (and, where appropriate a credit note issued) the customer will normally pay the amount agreed as due.
10. Payments are received by Pertemps either by cheques in the post, or by...
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