In a recent tax case the Tribunal held that customer overpayments are taxable as trading income.

According to the facts in Pertemps Recruitment Partnership Limited v HMRC [2010] UKFTT 218 (TC) customers had mistakenly overpaid the company for recruitment services. The unclaimed amounts were transferred to a balance sheet account and then released to the profit and loss account at financial year end.

The First Tier Tribunal confirmed that the overpayments, in this case which amounted to over £1,000,000 over a period of several years, constituted trading receipts accruing or arising from trade for tax purposes. This was despite the fact that the payments were unilateral or that customers might have an entitlement to claim the money back.

The Tribunal also noted that it is unlikely that a restitutionary claim by a customer would ever be barred as a result of the Limitation Act. This is because the limitation period only starts to run from when the customer discovers its mistake (or ought to have discovered its mistake) (Sempra Metals Ltd v IRC and another (HL) [2007] STC 1559).

VAT treatment of overpayments
The VAT treatment is slightly different than the direct tax treatment it appears:

From HMRC's V1-3  Section 10 paragraph 10.17

10.17     Overpayments

The value of a supply is not affected if a supplier receives payment twice for a single supply due to a mistake by the customer. The value remains the original advertised price and cannot be increased simply because of an overpayment and so the additional payment is outside the scope of VAT. This applies whether or not the supplier makes provision to return the overpayment.

However, if the overpayment is not returned and is used to pay or part pay a future supply then it becomes consideration for a supply

Thanks to Tim A for digging this out for us.

 

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