Spc00713

ERROR OR MISTAKE CLAIM – trading profit – some deposits unclaimed by the customer – whether deposits belong to the Appellant when received – yes – appeal dismissed

THE SPECIAL COMMISSIONERS

	GOWER CHEMICALS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in Cardiff on 30 October 2008

John Brooks, counsel, instructed by Griffith & Miles, chartered accountants, for the Appellant

Colin Williams, HMRC Local Compliance Appeals, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

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.
(1)	The trading activity of the Appellant company is the sale of chemicals
(2)	These are supplied to its customers in returnable containers.
(3)	The relationship between the Appellant and its customers are governed by the Appellant’s “General Conditions of Sale” (the “Conditions”).
(4)	Conditions 6.10 to 6.11 of the Conditions make provision for the payment of a “refundable deposit” by a customer in respect of a returnable container which remains the property of the Appellant at all times.
(5)	On the return of a container to the Appellant “in good condition and in reasonable time” the Appellant will issue a credit note to the customer to the value of the “refundable deposit” “which may be used to set off against any invoice raised” by the Appellant to that customer “within 12 months” following its due of issue “and thereafter shall become void” and the Appellant shall have no further liability to that customer.
(6)	Despite the issue of monthly statements by the Appellant in which any outstanding amount due to a customer were stated, credits were not taken in respect of all of the containers that had been returned.
(7)	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.
(8)	These sums had been included in the Appellant’s profit and loss accounts in respect of the above years.  However, following the decision of the Special Commissioner in Anise Limited & Other v Hammond (HMIT) [2003] STC (SCD) 258 an “error or mistake claim” under paragraph 51 schedule 18 of the Finance Act 1998 was made on behalf of the Appellant by its accountants 	Messrs. Griffith & Miles (“G&M”) on 9 June 2004 in respect of these unclaimed credits.
(9)	The “error or mistake” claims were refused by HMRC in a letter dated 19 November 2007 on the grounds that the scope of the Appellant’s trade “includes the provision of ‘returnable’ containers and ‘unclaimed deposits’ on such containers is a normal incident of that trade, i.e. trading income”.
(10)	An appeal against the refusal to allow the “error or mistake” claim was made by G&M by letter dated 17 December 2007.  Although not actually stated in that letter the grounds of the appeal is that the unclaimed deposits are not trading income of the Appellant.
3.	Mr Ian Butcher director of the Appellant gave informal evidence to elaborate on the facts.  I find the following additional facts:
(1)	Mostly the claim arises out of customers not claiming payment of the credit notes.  Contrary to the conditions of sale the credit note was not restricted to being “used against any invoice raised by [the Appellant to the Buyer]” in the condition quoted below (although there is also a reference to its being “encashed”) but would always be paid in cash if the customer asked for it.  I prefer Mr Butcher’s evidence to the conditions and accordingly paragraph 2(5) above in the agreed statement of facts needs to be modified to that extent.  
(2)	In about 20 per cent of cases the customer does not claim payment of the credit note.
(3)	In a small number of cases the customer pays the credit note mistaking it for an invoice.  Since Mr Williams concedes that this would not be a taxable receipt I need not refer to it, although the figures may need adjusting.
(4)	The accounting treatment of the deposits was that the Appellant brought the deposit into account and set up a provision of about 80 per cent against it.
(5)	Condition 6.10.3 of the Appellant’s General Conditions of Sale, second paragraph states:
If returnable containers have been duly returned in accordance with the requirements of this Condition 6.10 the Seller will issue the Buyer with a credit note to the value of the refundable deposit aid pursuant to Condition 6.10.2 which may be used to set off against any invoice raised by the Seller to the Buyer no earlier than the 20th day of he month following the month in which the credit note was raised PROVIDED THAT credit notes must be used or encashed within 12 months following their date of issue and thereafter shall become void and the Seller will have no further liability or obligation in respect thereof.
As stated above, the credit note is in practice paid in cash to a customer who asks for it.
(6)	The money from the deposits is used in the Appellants’ business and not put into a separate account.
4.	Mr Brooks contends that the deposit is refundable according to the Appellant’s General Conditions of Sale, initially by the issue of a credit note, which is either offset against payments due from the customer or paid in cash, so that the deposit money never belongs to the Appellant, who is holding it for the customer as security for the return of the container.  Accordingly, this case is distinguishable from Elson v Prices Tailors Limited 40 TC 671 in which the deposit was refunded in practice but without there being any legal obligation to do so.
5.	Mr Williams contends that from the beginning the deposit arises out of a sale transaction on trading account and so the deposit money belongs immediately to the Appellant.  Alternatively, it belongs to the Appellant when 12 months expires from the issue of the credit note when it becomes void.
6.	In Prices Tailors a customer ordering a made-to-measure garment (mainly suits) was required to pay a deposit.  There were suggestions that part payment was a better description than a deposit.  It was found as a fact that whatever the legal position concerning ownership of the deposits, employees had been instructed to refund the deposits if the customer for whatever reason declined the goods, so it seems that this was a goodwill payment by the company.  The deposits were held to be a receipt of the year in which they were paid. 
7.	The issue for me turns primarily on the nature of the receipt of the deposit by the Appellant.  The Appellant knows that about 20 per cent of deposits will not have to be repaid.  In my view this makes it impossible to say that the Appellant is merely holding the deposit for the customer. The straightforward analysis is that the deposit is a trading receipt just as the payment for the goods is a trading receipt but with the difference that about 80 per cent of the deposits will have to be repaid, for which it is right to make a provision.  While I agree that factually this distinguishes this case from Prices Tailors, I do not consider that this changes anything.  In that case the deposit was security for the completion of the garment that the customer had ordered.  Deposits were in fact repaid to customers who did not accept the garment even though there was no contractual obligation to do so.  The decision relied on Smart v Lincolnshire Sugar Co 20 TC 643 in which there was a contractual right to repayment of the deposit if a contingency occurred.  The need for a provision for this was discussed in the case and it is recorded in Prices Tailors that the same point was raised.  In my view the Appellant’s past accounting treatment was correct.  The deposit belongs to the Appellant as soon as it is received and should be brought into income at that point.
8.	I do not need to deal with Mr Williams’ alternative contention that the deposit becomes the property of the Appellant after the credit note becomes void after 12 months.  However, I agree with Mr Brooks that it must either be a trading receipt from the beginning or not at all, as the Special Commissioners found in Anise Limited v Hammond, which, as stated in the agreed facts, was the decision that encouraged the Appellant to make the error or mistake claim in this appeal.  The later timing of the receipt in Jay’s the Jewellers Limited v IRC 29 TC 274 depends on the statutory provisions of the Pawnbrokers Act under which the pawnbroker has no ownership of the pledge when it is made but after three years a new asset came into existence.
9.	Accordingly, I dismiss the appeal in principle and leave the figures to be agreed to reflect the times when the customer pays the credit note in error.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 5 November 2008

SC  3049/08

Authorities referred to in skeletons and not referred to in the decision:
Morley v Tattersall 22 TC 51
Tapemaze Ltd v Melluish 73 TC 167