CheckLists.Tax (beta)
P5. Receipt of compensation
INCOME TAX: TRADING
Taxable trading receipts
- Compensation 'for' a failure to receive a revenue trading receipt or to reimburse a revenue trading expense
General position
- When compensation is received, there are two key questions from a trading perspective:
(1) Is it a receipt of the trade;
(2) If it is, is it a capital or revenue receipt.
- Generally (but perhaps not always) whether compensation is a receipt of the trade depends on what it is 'for'.
- If it was "for" a loss consisting of a failure to receive a sum that would have been a trading receipt, it is a trading receipt.
- Similarly, if it is for a loss consisting of a trading expense that would not have been incurred, it is a trading receipt.
- On the other hand, if it is 'for' an injury or wrong suffered by the person in their personal capacity it is not a trading receipt (e.g. personal injury).
Treat in the same way as the receipt would have been treated
- "Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation." (Attwooll).
- "That statement [in Attwooll] of the relevant rule appears to their Lordships to be sound in principle and in accordance with earlier authorities." (Raja's Commercial College)
Irrespective of the source of the legal right to compensation
- "The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance, from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated, from an obligation to pay damages for tort, as in the present case, from a statutory obligation, or in any other way in which legal obligations arise." (Attwooll).
Principle applies equally to compensation for revenue expense
- "Although Diplock LJ refers to the trader's failure to receive a sum of money which would have been a revenue receipt, his principle must apply equally to compensation for his liability to pay a sum of money which was a revenue expense." (Deeny at 308).
- Applied in Gadhavi at §§61 - 65 to compensation for misselling of interest swaps.
- And in Wilkinson §21.
Caution re the 'for' approach as a complete test.
- A majority of HoL in Deeny Gooda refused to endorse Lord Hoffmann's view that the answer to the 'for' question would always determine whether a sum was a trading receipt (albeit it may be that it normally would):
- "Where compensation is received by a trader, two questions arise, viz, first, was the receipt of the compensation a receipt of the recipient's business and, second, was such receipt of an income or capital nature? I have no doubt that the test propounded by Diplock LJ correctly determines the answer to the second of those questions, ie whether such compensation falls to be treated as income or capital of the taxpayer's trade. As to the first of those questions, in the ordinary run of cases the receipt of a sum by a trader as compensation for the failure to receive what would have been a receipt of his trade will normally demonstrate that the compensation is itself a receipt of that business. But there may be unusual cases where the test propounded by Diplock LJ might not be appropriate to the correct determination of the question whether the compensation is a receipt of the taxpayer's business." (Lord Browne Wilkinson)
- The example given was Higgs v. Olivier - sum received by actor to compensate for not carrying on part of his trade for a limited period was not a receipt of the trade.
Legislation:
Cases:
London & Thames Haven Oil Wharves Ltd v. Attwool (1966) 43 TC 491 (CoA);
Raja's Commercial College v. Gian Singh & Co Ltd [1977] AC 312 (UKPC);
Deeny v. Gooda Walker Ltd [1996] STC 299 (HoL);
Gadhavi v. HMRC [2018] UKFTT 600 (TC), Judge McKeever;
Wilkinson v. HMRC [2020] UKFTT 362 (TC), Judge Beare;
HMRC manuals:
Commentary:
See also:
- Identifying what compensation is 'for'
How compensation is calculated is not determinative
- How the compensation is calculated/measured does not necessarily tell you what the compensation is 'for'.
- "But there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test." (Glenboig Union Fireclay at 464)
- "But even if a payment is measured by annual receipts, it is not necessarily in itself an item of income." (Van Den Berghs at 431, also approving the quote from Glenboig)
- See also Wilkinson, §31(3).
- Thus, the reduction in value of a capital asset may be determined by reference to the estimated loss of profit.
The nature of the cause of action, what damage is actionable, whether a loss is divisible
- Given that the method of calculating the compensation does not necessarily tell one what it is for, other factors must be relevant.
- There does not appear to be a consistent/single test for answering this question, but the following factors appear to be relied on.
The nature of the cause of action
- The law provides compensation for negligently caused personal injuries.
- Financial loss, if any, is part of the measure of that compensation, but not (normally) recoverable independent of the personal injury.
- Accordingly, one might say that the law is directly providing compensation 'for' the personal injury, measured in a variety of ways.
- "It is accepted, for example, that damages for personal injury are compensation for the personal injury, though partly calculated by reference to the income which the injured person would have earned (see British Transport Commission v Gourley [1956] AC 185). In Lewis v Daily Telegraph Ltd [1964] AC 234 it was decided that damages awarded to a company for libel are compensation for damage to its reputation, even though calculated in part by reference to the loss of profits which the libel has caused. In both cases, therefore, the damages were not taxable because they were not compensation for a revenue receipt. What both cases show is that the answer to the question of what the damages were for also provides the answer to the question of whether they arose out of the trade." (Deeny v. Gooda Walker Ltd at 309, Lord Hoffmann)
- In Gourley, it was said that the compensation was for the reduction/destruction of the claimant's earning potential, rather than directly for the loss of future earnings.
- On that basis, it is difficult to reconcile this with the cases on damaged physical assets (where there is also a reduction of 'earning potential').
What damage is independently actionable
- Emphasis was placed, in Attwooll, on the Court's view that the loss of use of the jetty would have been actionable even if there had been no physical damage. Accordingly, since both losses (loss of use and physical damage) were independently actionable, the damages for loss of use were not attributable to the physical damage.
- CoA said that the negligence cause of action provides compensation, directly, for:
(1) The physical damage to the asset - which is measured as the cost of repair.
(2) Preventing use of the asset for a period of time - which is measured as the loss of trading receipts.
- CoA said that prevention of use of an asset caused by negligence would give rise to compensation even in the absence of physical damage, so the compensation was 'for' the prevention of use and the consequent loss of trading receipts (rather than only 'for' the physical damage, measured in two ways).
- "I think that this analysis starts too late. It assumes that the cause of action was based on the physical harm done to the jetty and on nothing else. But I do not think this is so. The cause of action was based upon the loss sustained by the Respondent trader by the negligent navigation of the tanker, and the loss sustained because the jetty could not be used for 380 days would have been recoverable even if there had been no physical harm to the jetty, as, for example, if the tanker had sunk alongside the jetty, so preventing its use. I do not see how the identity of what the £21,000 was paid for can be affected by whether or not the loss of use was accompanied by physical damage." (Attwooll at 516)
- It is questionable whether this is correct:
- "The economic loss suffered in cases of this kind, which cannot be recovered, is usually referred to as "pure economic loss", meaning economic loss that is not consequent on damage to, or loss of, the claimant's property (or on personal injury to the claimant)." (Armstead, §20).
- If a loss is independently actionable, that suggests it is part of the nature of the cause of action.
- If the compensation is paid in respect of loss/damage that is not, per se, actionable, the compensation might be said to be for the actionable damage.
Divisible losses/compensation
- Some of the statements in Attwooll, however, would seem to be inconsistent with this: if a sum 'represents' profit which would otherwise have been earned, it is a revenue trading receipt.
- Or they ask whether one loss is 'divisible' from another.
- In relation to compulsory purchase (see below), once it was decided that the otherwise indivisible lump sum compensation representing the value of the property to the owner could be apportioned between capital value and disturbance, loss of profit etc. the latter were considered to be trading receipts.
- However, on that basis, it is difficult to see why the damages for personal injury or libel are not 'divisible' and or do not 'represent' profit which would otherwise have been earned.
Legislation:
Cases:
Glenboig Union Fireclay Co Ltd v. IRC (1922) 12 TC 427 (HoL);
Van Den Berghs Limited v. Clark (1935) 19 TC 390 (HoL);
Higgs v. Olivier, 33 TC 136;
London & Thames Haven Oil Wharves Ltd v. Attwool (1966) 43 TC 491;
Deeny v. Gooda Walker Ltd [1996] STC 299;
Wilkinson v. HMRC [2020] UKFTT 362 (TC), Judge Beare;
Armstead v. Royal & Sun Alliance Insurance Company Ltd [2024] UKSC 6;
HMRC manuals:
Commentary:
See also:
- Capital v. revenue
Destruction or exhaustion of a source of profit
- "Only where compensation is paid for the destruction or exhaustion of a source of profit that it is capable of constituting capital" (Able, §12).
- Lump sum paid for the destruction of the profit-earning capacity of a capital asset (thereby diminishing its value) is a capital receipt (Able, §9).
- Consideration receive for the once and for all realisation of the capital value of an asset is capable of being a capital receipt even if the asset remains in existence if its capacity as a source of profit is exhausted (Able, §§9 - 10).
- If an asset has a number of potential ways to produce income, the capital value reflects each source and destruction of one source may give rise to a capital receipt (Able, §10).
- E.g. in McClure, a payment to deposit subsoil on land was capital because that could only happen once, even though the land was retained and had other uses.
- "In McClure the taxpayer retained his interest in his land, part of which was adjacent to a motorway. He continued to receive rent from his agricultural tenant. But once sub-soil from the construction of the motorway had been deposited on the land, it could not be used again for dumping. One of the sources of income derived from the land had been exhausted, although it was still a source of agricultural rent. Compensation could be characterised as a once and for all realisation of that proportion of the capital value of the land which reflected the source of profit from dumping waste: it was a capital receipt." (Able, §11).
- In Able, temporary interruption to use of a landfill site during which market conditions changed meaning its potential as a landfill site could not be fulfilled was not the exhaustion of a source of profit - there was no permanent impact, market conditions changed (§14).
Temporary loss of use
- Compensation for temporary loss of use of a capital asset generally income (Able, §15).
Legislation:
Cases:
McClure v Petre [1988] 1 WLR 1386;
Able (UK) Ltd v. HMRC [2007] EWCA Civ 1207, Moses, Buxton, Lawrence Collins LJJ;
HMRC manuals:
Commentary:
See also:
- Compulsory acquisition
Compensation is for the loss of the land
- In Glasgow & South Western Railway Co it was held that compensation paid on the compulsory acquisition of land solely represented the value of the land to the person who has been compelled to sell, even if it takes into account the loss of business (accordingly stamp duty was payable on the full amount).
- "In treating of that value, the value under the circumstances to the person who is compelled to sell (because the statute compels him to do so) may be naturally and properly and justly taken into account; and when such phrases as "damages for loss of business" or "compensation for the goodwill" taken from the person are used in a loose and general sense, they are not inaccurate for the purpose of giving verbal expression to what everybody understands as a matter of business; but in strictness the thing which is to be ascertained is the price to be paid for the land - that land with all the potentialities of it, with all the actual use of it by the person who holds it, is to be considered by those who have to assess the compensation." (at 321).
Statutory apportionment/division
- What is now TCGA 1992, s.245 states that for the purposes of apportionment under s.52(4) so as to treat part as a capital sum, the fact of the compulosry acquisition and "any statutory provision treating the purchase price or compensation or other consideration as exclusively paid in respect of the land itself, shall be disregarded".
- In Stoke-on-Trent CC it was held that this provision permitted the "breakdown of that compensation into its component parts so as to enable what may be called the capital element and the income element to be separated by apportionment".
- Further, the amount apportioned to income would be capable of being taxed as income, in which case it would be excluded from the CGT computation.
- Accordingly it abolished the 'illogical' distinction between "compensation arising from the negligence of a tortfeasor which could be broken down into its capital and income elements so that income tax was chargeable on the latter but not on the former, and compensation for compulsory acquisition where seemingly before 1969 such a breakdown was not permissible."
- The argument that this only applied for CGT purposes was rejected.
- "The effect of an apportionment to which para 11 [now s.245] refers, though it be made for the purposes of a computation of capital gain, is to free the compensation for temporary loss of profits of its capital nature and enable it to be treated for what it in truth is, namely a trading receipt."
- Query whether this is correct if the payment recognises the complete loss of the business (as opposed to temporary disruption upon relocation).
Legislation: TCGA 1992, s.52, s.245;
Cases:
IRC v. Glasgow & South Western Railway Co (1887) 12 App Cas 315, HoL;
Stoke-on-Trent CC v. Wood Mitchell & Co Ltd [1979] 2 All ER 65 (CoA);
HMRC manuals:
BIM40115 - Specific receipts: compensation and damages: tangible assets fixed capital;
BIM55235 - Farming: compensation for land etc acquired by public bodies;
Commentary:
See also:
- Contractual sums and damages
Ordinary contracts
- The same question of what the contractual sum is 'for' arises.
- "To this may be added the proposition that damages for breach of contract paid to replace profits which the taxpayer would or might have made under the contract are prima facie a revenue receipt; see Bush, Beach & Gent v Road." (Sommerfelds Ltd v. Freeman).
- Compensation for failure to supply goods that T would have disposed of as trading stock is a revenue trading receipt (Sommerfelds Ltd v. Freeman).
- The contract may well be explicit as to what the sum is for, e.g. agreed damages.
- Burmah Steam Ship - agreed contractual compensation where ship repairers exceeded the stipulated time for repair of the ship were a revenue trading receipt.
- Insurance receipts are generally contractual sums in respect of specific losses. See N3. Insurance proceeds.
- E.g. the insurance may be specifically for the loss of profit rather than any damage or destruction of an asset (British Columbia Fir).
Contracts going to the whole structure of T's trade
- Damages for consenting to the termination of a contract going to the root of T's trade is a trading receipt but may be capital - Van Den Berghs Limited v. Clark.
- In essence, such contracts are capital assets (providing an enduring advantage) and the situation is one of damages for loss of a capital asset.
- It was important that the sum related to the early termination of the contract rather than being in respect of profits due to T under the contract up to the date of termination (at 431).
- Equally, if the sum was simply the aggregate profits they would otherwise receive in future that may have been different:
"If the Appellants were merely receiving in one sum down the aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. But even if a payment is measured by annual receipts, it is not necessarily in itself an item of income."
- What was important was that the contract related to the whole structure of T's profit-making apparatus:
"The three agreements which the Appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the Appellants' profit-making apparatus. They regulated the Appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a trader's activities can be regarded as an income disbursement or an income receipt." (at 431 - 432)
Distinguishing ordinary contracts from structural contracts
- Kelsall Parsons: compensation for the termination of a 3 year agency contract after 2 years was a revenue trading receipt.
- Potentially different if it was T's sole agency contract: "Their business, indeed, was to obtain as many contracts of this kind as they could, and their profits were gained by rendering services in fulfilment of such contracts. The Appellants' business is entirely different from the business carried on by someone who, under contract, acts exclusively as agent for a single principal." (Kelsall Parsons).
- But consider whether it is a normal incident of T's business that the contract is modified, altered or discharged (Kelsall Parsons at 619).
- Compensation for breach of a contract granting a licence to produce a play (where the grantor had already granted film rights which led to reduced profit) was revenue in Vaughan v. Parnell:
- "In my opinion the nature of the Respondent Company's business is such that the acquisition of the licence to produce plays is an ordinary incident of their business and that the acquisition of each licence to produce a particular play does not constitute that licence a capital asset, but is merely the acquisition of their stock-in-trade..."
Legislation:
Cases:
Burmah Steam Ship Company Limited v. CIR (1930) 16 TC 67;
Van Den Berghs Limited v. Clark (1935) 19 TC 390 (HoL);
R v. British Columbia Fir and Cedar Lumber Co Ltd [1932] AC 441;
Kelsall Parsons & Co v. CIR (1938) 21 TC 608 (Court of Session);
Vaughan v. Parnell (1940) 23 TC 505 (Lawrence J);
Sommerfelds Ltd v. Freeman [1967] 2 All ER 143 (Plowman J);
HMRC manuals:
Commentary:
See also:
- T suffers both revenue and capital loss
- In some cases, the same wrong may be reflected in both revenue and capital losses.
- For instance, in Donald Fisher, an estate agent's negligence caused the rent on a lease to be higher than it should have been. This both (i) led to higher revenue expenses in future (the increased rent); and (ii) led to a reduction in the value of a capital asset (the lease).
- CoA held that the claim was for the extra rent and damages following trial would have been measured by reference to the rent rather than any diminution in value.
Legislation:
Cases: Donald Fisher (Ealing) Ltd v. Spencer [1989] STC 256 (CoA);
HMRC manuals:
Commentary:
See also:
Voluntary compensation
- Voluntary increase in price for earlier work/payment for failure to receive profit earning opportunity taxable
- A payment received to recognise that earlier work done had been inadequately remunerated was a trading receipt in McGowan v. Brown.
- There was a custom that an estate agent would receive low remuneration for negotiating the purchase of a site for development on the basis that the same estate agent would get the more lucrative work of selling the developed properties.
- The site-buyer sold it on before developing it and made an ex gratia payment to the estate agent in response to protests from the estate agent.
- Held: taxable. It was paid because the estate agent had been inadequately remunerated for the earlier work and had a moral claim to compensation when not appointed for the more lucrative work.
Legislation:
Cases: McGowan v. Brown [1977] STC 342, Templeman J;
HMRC manuals:
Commentary:
See also:
INCOME TAX: PROPERTY INCOME
- No difference between investors and traders
- "Their Lordships recognise that for some purposes in connection with income tax there may be a distinction between traders and investors and they are willing to assume that the landlords are investors for this purpose. But their Lordships are unable to see any reason of logic or principle why this distinction should be relevant to the question whether awards of damages are liable to income tax or not. There seems to be no reason why their treatment for tax purposes should depend upon whether the recipient is a trader or an investor, rather than upon the essential character of the damages themselves...
...Accordingly their Lordships are of opinion that, for the purposes of this appeal, it is immaterial whether the landlords are traders or investors, and that the damages which come in place of lost income fall to be treated as income for income tax purposes." (Raja's Commercial College).
- Common ground "and rightly so" in Wilkinson that trading principles applied to property business (§24).
- ITTOIA s.264 states that a UK property business includes every transaction which the person enters into for the purpose of generating income from land in the UK.
- In Gadhavi that included swap agreements: "[53]...The swap agreements related to loans which were taken out in order to buy properties to expand the property business. The sums paid as compensation therefore arose from the carrying on of the business."
Compensation received after cessation
- Charge on post-cessation receipts of a property business in ITTOIA s.349.
- Applied to compensation for swap misselling in Gadhavi (§56).
Legislation:
Cases:
Raja's Commercial College v. Gian Singh & Co Ltd [1977] AC 312 (UKPC);
Gadhavi v. HMRC [2018] UKFTT 600 (TC), Judge McKeever;
Wilkinson v. HMRC [2020] UKFTT 362 (TC), Judge Beare;
HMRC manuals:
Commentary:
See also:
INCOME TAX: ANNUAL PAYMENTS
- Periodical payments of personal injury damages
- Exclusion from charge in ITTOIA s.731.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
INCOME TAX: INTEREST
- Lump sum compensation may contain interest
- If a calculation of interest is used as a means of arriving at the sum of damages, that sum may be wholly capital and not interest.
- "But this cuts both ways: a calculation of interest may be used as a means of arriving at the amount of a sum for damages, but what is paid may be wholly a capital sum. The House of Lords, in the Westminster Bank case, offered no criticism of earlier cases, such as CIR v Ballantine (8TC595) and Glenboig Union Fireclay Co Ltd v CIR (12TC427), where amounts computed as interest and even - in the former case - described as interest, were nevertheless held to be capital." (SAIM2070).
- On the other hand, a lump sum may compromise damages and interest on those damages (SAIM2070).
- Where an out of court settlement is agreed: "...there may be little documentation on how the figure was arrived at. There is case law authority (for example, Perrin v Dickson, 14TC608) for dissecting a lump sum into capital and income elements. However, the question of whether the parties intended any part of the lump sum to represent compensation for delay in payment will be wholly one of fact in any particular case." (SAIM2070).
Legislation:
Cases:
HMRC manuals: SAIM2070 - Interest: lump sum receipts and compensation;
Commentary:
See also:
- Compensation for the delay in receiving payment after the cause of action arose is interest
- Interest on damages/compensation is taxable as interest (Riches v. Westminster Bank Limited - concerning deduction at source).
- "[This argument] assumes an incompatibility between the ideas of interest and damages for which I see no justification. It confuses the character of the sum paid with the authority under which it is paid. Its essential character may be the same, whether it is paid under the compulsion of a contract, a statute or a judgment of the court. In the first case it may be called 'interest' and in the second and third cases 'damages in the nature of interest,' or even 'damages.' But the real question is still what is its intrinsic character, and in the consideration of this question a description due to the authority under which it is paid may well mislead." (at 406).
- In Simpson, dividends and interest belonging to T had been paid to the German authorities during the war. T received compensation under the Treaty of Versailles which provided for "compensation in respect of damage or injury inflicted upon their property, rights or interests" in Germany. The compensation was calculated on the basis of an interest rate. It was held that this sum was not interest. Regarded as a case of a 'very special character' in Riches and Raja's Commercial College.
- Interest in compensation for financial misselling taxable as such in Gadhavi (§69) and Wilkinson (§68).
Legislation:
Cases:
Simpson v. Executors of Bonner Maurice as Executor of Edward Kay (1929) 14 TC 580
Riches v. Westminster Bank Limited [1947] AC 390 (HoL);
Raja's Commercial College v. Gian Singh & Co Ltd [1977] AC 312 (UKPC);
Gadhavi v. HMRC [2018] UKFTT 600 (TC), Judge McKeever;
Wilkinson v. HMRC [2020] UKFTT 362 (TC), Judge Beare;
HMRC manuals: SAIM2070 - Interest: lump sum receipts and compensation;
Commentary:
See also:
- Interest on damages for personal injury/death (exemption)
- Interest on damages for personal injury or death included in a sum awarded by a court is exempt (s.751(1)).
- Only applies to the period up to the making of the order (not to any delay between the making of the order and paying).
- If the award is by a foreign court, exemption only applies if the foreign state also exempts the interest.
-Exemption also applies to out of court settlements in satisfaction of such a cause of action (again, up to the point of settlement) (s.751(2)).
Legislation: ITTOIA s.751;
Cases:
HMRC manuals: SAIM2330 - Interest: exemptions: personal injury damages;
Commentary:
See also:
EMPLOYMENT TAX
- General approach
- It is not apparent that the same approach applies to employment income as elsewhere.
- i.e. the fact that compensation is 'for' lost earnings does not necessarily mean it is a payment that is 'from' employment.
- Thus: "A redundancy payment has therefore a real element of compensating or relieving an employee for the consequences of his not being able to continue to earn a living in his former employment." but is not an emolument from employment ("A redundancy payment would not be an emolument from the employment") (Mairs v. Haughey).
Legislation:
Cases: Mairs v. Haughey [1993] STC 569 (HoL);
HMRC manuals:
Commentary:
See also:
- Compensation for injury for which third party is liable
- In Gourley, it was common ground that damages for personal injury were not taxable insofar as they related to loss of earnings (up to the time of hearing or in future). Earl Jowitt expressly agreed with that proposition (at 198).
- This appears correct - the tortfeasor is not paying for the employees services, which are never provided. The compensation is for the loss or destruction of earning capacity.
- "before the wrong the employer was paying for the plaintiff's services, whereas now he is paying the plaintiff's loss and he will have to pay someone else to perform the services." (Lord Reid at 214)
- "In an action for personal injuries the damages are always divided into two main parts. First, there is what is referred to as special damage, which has to be specially pleaded and proved. This consists of out-of-pocket expenses and loss of earnings incurred down to the date of trial, and is generally capable of substantially exact calculation. Secondly, there is general damage which the law implies and is not specially pleaded. This includes compensation for pain and suffering and the like, and, if the injuries suffered are such as to lead to continuing or permanent disability, compensation for loss of earning power in the future..." (Lord Goddard at 206)
- "So, too, if his earning capacity is lessened or destroyed, the loss cannot be measured so as to ensure that he is no worse off in the future than he was in the past, and, indeed, if it turned out that the amount of his disability was less than was anticipated at the trial, he might even be overcompensated." (Lord Goffard at 208).
Legislation:
Cases: British Transport Commission v Gourley [1956] AC 185;
HMRC manuals:
Commentary:
See also:
- Compensation for injury for which employer is liable
Compensation for injury not earnings
- "Reasonable lump sums paid as compensation for a specific injury suffered are not earnings within section 62 ITEPA 2003 and are not treated as employment income by section 403 (see EIM13610 onwards)." (EIM06450).
- In Gourley, Lord Reid expressly considered that it should make no difference that the wrongdoer is the employer.
- "before the wrong the employer was paying for the plaintiff's services, whereas now he is paying the plaintiff's loss and he will have to pay someone else to perform the services." (Lord Reid at 214)
- Assuming the employer does engage someone else to perform the services, tax will be due in the ordinary way on the replacement person's earnings for providing those services.
- This fits with the exemption from s.401 tax for payments on termination on account of injury or disability (s.406(b)).
Query whether benefits code applies
- "However, payments may be taxable under the benefits code as cash benefits (see EIM21006)." (EIM06450).
- It is considered that the benefits code will not apply if the payment is no more than what the employee would be entitled to by way of damages, as that is a fair bargain and not a benefit.
Periodic sick pay taxable as earnings
- "Sums which are calculated on a weekly, monthly, or similar basis and paid for periods of absence from work, or for periods after the employee returns to work when he or she is unable to earn as much as they did before the injury, will usually be taxable as earnings in the same way as sick pay (or ordinary pay when paid after the employee returns to work). The guidance at EIM06410 to EIM06430 applies." (EIM06450).
Not taxable under s.401
- The s.401 charge does not apply to payments or benefits provided (s.406):
(1) In connection with the termination of employment by death;
(2) On account of injury to, or disability of, an employee.
- Injury includes psychiatric injury but not injured feelings.
Legislation: ITEPA 2003, s.406;
Cases: British Transport Commission v Gourley [1956] AC 185;
HMRC manuals: EIM06450 - Employment income: sick pay and injury payments: injury payments;
Commentary:
See also:
- Wrongful termination/repudiation of employment contract
General earnings
- Compensation to compromise a claim for wrongful repudiation of employment contract is not earnings from employment as it arises by reason of the disappearance of the employment (Du Cros).
- "The contract of service was at an end. The source of income had disappeared, and the sum paid by way of damages could not be regarded as a sum derived from the employment. It was something which arose outside the employment. It was something to which Mr. Du Cros became entitled by reason of the disappearance of the employment." (Williams's Executors at 38).
- Chibbett v. Robinson - payment to a firm that managed a company upon termination/liquidation out of the company's 'abundant prosperity' was a "testimonial for what they had done in the past in their office which has now terminated".
- "I do not think that is taxable as a profit. It seems to me that a payment to make up for the cessation for the future of annual taxable profits is not itself an annual profit at all I do not know whether it has arisen or been discussed, and perhaps the less I say about it the better, but I should not have thought that either damages for wrongful dismissal or a payment in lieu of notice, at any rate if it was for a longish period - I will not say a payment in lieu of notice, I will say a voluntary payment in respect of breaking an agreement which had some time to run - would be taxable profits. But at any rate it does seem to me that compensation for loss of an employment which need not continue, but which was likely to continue, is not an annual profit within the scope of the Income Tax at all." (at 61).Chibbett v. Robinson (1924) 9 TC 48;
Section 401
-
Legislation:
Cases:
Chibbett v. Robinson (1924) 9 TC 48;
Du Cros v. Ryall (1935) 19 TC 444;
CIR v. Williams's Executors (1944) 26 TC 23;
HMRC manuals:
Commentary:
See also:
CAPITAL GAINS TAX
- Compensation for damage/loss as a capital sum derived from an asset (deemed disposal)
General rule
- Capital sums received by way of compensation for any kind of damage or injury to assets, including loss or depreciation, are treated as giving rise to a deemed disposal (TCGA, s.22(1)).
- Logically a deemed disposal of the asset from which the compensation is derived.
- Capital sum means any money or money's worth which is not excluded from the consideration taken into account in computation of the gain (s.22(3)).
Consideration for disposal
- Not stated, but presumably the value of the capital sum.
- HMRC appear to agree: "The disposal proceeds will be equal to the market value of the warrants on the first day they are quoted." (CG55477).
- It would be absurd to apply s.17 and treat the consideration for the disposal as being the market value of the asset from which the capital sum is derived as the capital sum may bear no relation to the value of the asset from which it is derived.
- Exclude sums chargeable to income tax (e.g. trading revenue receipts and interest) (s.37).
- Also exclude sums that would be taken into account but for the fact that any profits are not chargeable to income tax (s.52(2)).
Allowable expenditure
- Allowable expenditure will be determined by reference to the asset regarded as disposed of.
- If T retains the asset, apply the part disposal rules (CG12971).
Time of disposal
- Is when the capital sum is received (s.22(2)).
Legislation: TCGA 1992, s.22;
Cases:
HMRC manuals:
CG55477 - Quoted options to subscribe for shares: bonus issue of share warrants;
Commentary:
See also:
- The right of action as an asset from which the compensation may be derived
General position
- There is a deemed disposal wherever a capital sum is derived from an asset (s.22).
- Assets include rights of action (Zim Properties).
- "Either way it would in my view be inconsistent with the decision in O'Brien (Inspector of Taxes) v Benson's Hosiery (Holdings) Ltd to hold that a right to bring an action to seek to enforce a claim that was not frivolous or vexatious, which right could be turned to account by negotiating a compromise yielding a substantial capital sum, could not be an 'asset' within the meaning of that term in the capital gains tax legislation. I propose, for the sake of convenience, to refer to the right that the taxpayer company had, in that sense, to bring an action against the firm as its 'right to sue' the firm." (Zim Properties Ltd at 106)
- Not all rights of action are assets, e.g. the right to sue for the purchase price under a contract of sale (Zim Properties Ltd, at 108).
Determining whether the right of action is the source: look at the reality of the matter
- HMRC accept that it is necessary to look for the real rather than immediate source of the capital sum (CG12985).
- “From that it follows that a capital sum may be derived from assets within the meaning of the general words in s 22(3) even though those assets may not be the immediate source of that sum...The true view was hinted at by Fox J in O'Brien (Inspector of Taxes) v Benson's Hosiery (Holdings) Ltd when he referred to 'the reality of the matter'. One has to look in each case for the real (rather than the immediate) source of the capital sum.” (Zim Properties Ltd at 106)
- In Zim Properties Ltd, T received compensation for the fall in value of properties occurring following a solicitor’s negligence that caused a sale to collapse. T still had the properties in exactly the same state and the Court held that the real source of the compensation was the right to sue, not the properties (at 108).
- By contrast, in Pennine Raceway Ltd, money payable under a statutory right to compensation for the depreciation in value of a licence was held to derive from the licence, not the statutory right:
- "In the present case the company had an asset, which was the licence, and that licence depreciated in value when the planning permission was revoked. For that depreciation they are entitled to a capital sum by way of compensation, and their right to the compensation is given by s 164(1) of the Town and Country Planning Act 1971 because their asset (which made them 'a person interested in the land') has sustained loss or damage which is directly attributable to the revocation of the permission. It is clear that the capital sum is 'derived' from the asset." (at 130 - 131).
- Where an asset has been totally or partially lost, destroyed or damaged, the capital sum derives from the asset, not the right of action (CG13020).
- Statutory compensation held not derived from lease in Drummond v. Brown where lease was not lost but came to an end through passage of time (and see (CG12995). Compare with Davenport v. Chilver and Davis v. Powell.
- "The decisions in Davis (Inspector of Taxes) v Powell [1976] 51 TC 492 and Drummond (Inspector of Taxes) v Brown [1983] 58 TC 67 indicate that a statutory right to reimbursement of expenses is not a capital sum derived from an asset for the purposes of s22(1) TCGA92." (CG12995).
Allowable expenditure
- There is usually no base cost for the acquisition of the right of action (ESC D33, §2).
- HMRC allow deduction for any legal and professional fees incurred in pursuing the claim.
- Thus, if the claim fails or expenses exceed compensation, a capital loss may arise (§2).
Legislation: TCGA 1992, s.22;
Cases:
Davis v. Powell [1976] 51 TC 492
Drummond (Inspector of Taxes) v Brown [1983] 58 TC 67;
Davenport v Chilver [1983] 57 TC 661
Zim Properties Ltd v. Procter [1985] STC 90;
Pennine Raceway Ltd v. Kirklees MC [1989] STC 122;
HMRC manuals:
CG12985 - Capital sums derived from assets: s22(1) TCGA92: meaning of ‘derived from assets’;
CG12995 - Capital sums derived from assets: s22(1) TCGA92: statutory rights;
Commentary:
See also:
- Exclusion of damages for wrong suffered in T's person or in T's profession/vocation
- There is a statutory exclusion from charge for sums obtained by way of compensation or damages "for any wrong or injury suffered by an individual in his person or in his profession or vocation" (TCGA s.51(2)).
- Only applies to individuals
- Also applies to damages for professional negligence relating to the pursuit of such compensation (ESC D33, §12).
- Applies to compensation received by a person other than the individual who suffered the wrong, e.g. relative of a deceased (ESC D33, §12).
Meaning of "in the person"
- "The words ‘in his person’ are to be read in distinction to ‘in his finances’ but they embrace more than physical injury so that distress, embarrassment loss of reputation or dignity may all be suffered ‘in the person’. Compensation or damages for unfair or unlawful discrimination suffered ‘in the person’ and for libel or slander (in Scotland defamation) would thus be included." (ESC D33, §12).
- Includes compensation for emotial distress caused by the death of another person and compensation for loss of financial support (ESC D33, §12).
Meaning of "in his profession or vocation"
- "refer to compensation or damages suffered by an individual in his professional capacity such as unfair discrimination, libel or slander (in Scotland, defamation) as distinct from ‘in his finances’." (ESC D33, §12).
- HMRC also include in a person's trade or employment (ESC D33, §12).
Legislation: TCGA 1992, s.51;
Cases:
HMRC manuals: CG13030 - Compensation: personal compensation or damages;
Commentary:
See also: ESC D33;
- Disposal of right of action that relates to underlying asset (treat as disposal of the underlying asset)
- Where the right of action is the real source of the capital sum, but it does relate to an underlying asset (as in Zim Properties Ltd), HMRC allow T to treat the capital sum as being derived from the underlying chargeable asset (ESC D33, §9).
- HMRC say this applies where the loss or disadvantage is suffered 'in connection with' a form of property which is an asset (CG13020).
- The treatment allows any reliefs or exemptions that would apply to disposal of the underlying asset to apply to the deemed disposal.
- E.g. private residence relief or the exclusion for chattels/wasting assets.
- "HMRC will consider extending any statutory time limits for reliefs in circumstances where there has been a delay in obtaining a capital sum by way of compensation." (CG13020).
Legislation:
Cases:
HMRC manuals:
CG13020 - Capital sums derived from assets: section 22(1) TCGA 1992: extra statutory concession D33;
Commentary:
See also: ESC D33;
- Disposal of right of action that does not relate to an underlying asset: concessionary exemption
General
- This situation may arise where a professional gives incorrect advice in relation to tax or financial matters or where it involves a private or domestic matter (CG13020).
Breaches of contract
- "A legal action involving a breach of contract (whether or not in relation to a personal or private matter) will not be within the terms of the concession if the capital sum was derived from a contractual right or from an asset that was the subject of the contract, see CG13000." (CG13020).
- See CG13000.
Automatic exemption for first £500,000
- "A gain of £500,000 or less accruing on disposal of a right of action in circumstances that do not involve an underlying asset will, by concession, be treated as exempt." (CG13020).
- The first £500,000 is automatically exempt even if the total sum is higher (CG13020).
- Threshold is applied to the total received from a set of legal proceedings rather than each individual sum received (CG13020).
- FTT has no jurisdiction over the concession - see Gadhavi §78.
Claim for exemption in excess of £500,000
- HMRC will consider claims for exemption of the sum exceeding £500,000.
- Claims can be made in advance or in the tax return to which it relates (CG13021).
- Time limit is the time limit for amending the return (usually 12 months post filing date).
- See the procedure at CG13021.
HMRC's practice re accepting claims
- "A claim that meets all of the following conditions will be accepted:
(1) the right of action was acquired in connection with goods or services that the payer - or a connected person (CG14580 et seq), associated company (CTM03530) or person acting in an intermediary capacity for the payer - has provided as part of their trade, profession or vocation;
(2) the first condition shall be considered to be met in all cases where the right of action relates to mis-selling of a financial product and the person who provides that financial product is regulated by the Financial Conduct Authority;
(3) the payee did not acquire the right of action by means of a spouse's or civil partner’s transfer or by a transfer within a group (CG45300+);
(4) the payee did not acquire the right of action from another person for consideration (CG14500)." (CG13024).
Legislation:
Cases:
Gadhavi v. HMRC [2018] UKFTT 600 (TC), Judge McKeever;
HMRC manuals:
CG13020 - Capital sums derived from assets: section 22(1) TCGA 1992: extra statutory concession D33;
CG13021 - claims for extension of Paragraph 11;
CG13024 - extra statutory concession D33 amended from 27 January 2014: reviewing a claim;
Commentary:
See also: ESC D33;
- Use of compensation to repair asset
- Does not apply to wasting assets (s.23(8)).
Legislation: TCGA s.23;
Cases:
HMRC manuals:
Commentary:
See also:
- Compensation small compared to asset
XX
Legislation: TCGA s.23;
Cases:
HMRC manuals:
Commentary:
See also:
VAT
VAT on receipt of compensation
HMRC take a broad view of when compensation is subject to VAT
"The fundamental test of whether there is the necessary direct link between a supply and the consideration will already have been satisfied as regards a VAT-registered trader’s normal income. Thus, the question will be, why isn’t other income it has received also within the scope of VAT, particularly if it is from the same customer?" ( VATSC05910)
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
EXAMPLES
- Personal injury and death
Trading: for the personal injury/death, not a trading receipt
- Where a person is entitled to compensation for a personal injury, the compensation is for the personal injury even if it is quantified by reference to a number of factors (pain and suffering, loss of earnings/profit etc.).
- "It is accepted, for example, that damages for personal injury are compensation for the personal injury, though partly calculated by reference to the income which the injured person would have earned (see British Transport Commission v Gourley [1956] AC 185). In Lewis v Daily Telegraph Ltd [1964] AC 234it was decided that damages awarded to a company for libel are compensation for damage to its reputation, even though calculated in part by reference to the loss of profits which the libel has caused. In both cases, therefore, the damages were not taxable because they were not compensation for a revenue receipt. What both cases show is that the answer to the question of what the damages were for also provides the answer to the question of whether they arose out of the trade.” (Deeny v. Gooda Walker Ltd).
- Gourley regards the compensation as for the loss/destruction of earning capacity.
- HMRC agree:
- "Thus, damages received for such personal injuries should not be included in the computation of professional or trading receipts, even sums calculated by reference to the loss of income already sustained, or the loss of future earning power." (BIM40105).
- This is also supported by the exclusion from tax for interest on personal injury/death awards (ITTOIA s.751), which would be surprising if the awards themselves were taxable.
- The position is a fortiori where the individual dies.
- Not clear how some of the broader statements in Attwooll are consistent with this:
- e.g. "It has been sought to argue that moneys received from insurers are in a different category from moneys recovered from wrongdoers; but, with all possible respect to the argument which has been advanced in that respect, it seems to me to be quite without foundation. In either case the question must be, what does the sum recovered represent, and in either case the answer to that question must be that it represents profit which would otherwise have been earned by the use of the thing concerned" (at 512).
Employment income: not paying for the services, paying for the wrong
- The tortfeasor is not paying for the employees services, which are never provided. The compensation is for the loss or destruction of earning capacity.
- The position is a fortiori where the compensation arises as a result of the death of the employee.
- See further above on Gourley.
Legislation:
Cases:
British Transport Commission v Gourley [1956] AC 185;
Deeny v. Gooda Walker Ltd [1996] STC 299;
HMRC manuals: BIM40105;
Commentary:
See also:
- Libel and defamation compensation
Libel compensation is 'for' damage to reputation not loss of profit
- "In Lewis v Daily Telegraph Ltd [1964] AC 234 it was decided that damages awarded to a company for libel are compensation for damage to its reputation, even though calculated in part by reference to the loss of profits which the libel has caused. In both cases, therefore, the damages were not taxable because they were not compensation for a revenue receipt. What both cases show is that the answer to the question of what the damages were for also provides the answer to the question of whether they arose out of the trade." (Deeny v. Gooda Walker Ltd at 309, Lord Hoffmann)
- In Lewis, one claimant was a company, the other was an individual.
- The individual could suffer injury to feelings, but the company could not.
- Both could suffer injury to reputation, but for the company that would sound in money: loss of income, damage to goodwill.
- "There can be no difference in principle between loss of income caused by negligence and loss of income caused by a libel. Let me take first the case of the plaintiff company. A company cannot be injured in its feelings, it can only be injured in its pocket. Its reputation can be injured by a libel but that injury must sound in money. The injury need not necessarily be confined to loss of income. Its goodwill may be injured. But in so far as the company establishes that the libel has, or has probably, diminished its profits, I think that Gourley's case is relevant." (Lord Reid at 262)
- For the company:
"But damages for libel have to be assessed by a jury, and juries are not expected to make mathematical calculations, so they can only deal with this matter on broad lines. I think that a jury ought to be directed to the effect that if they think that the plaintiff company has proved that it has suffered or will suffer loss of profit as a result of the libel they must bear in mind that the company would have had to pay income tax at the standard rate out of that profit if it had been earned and would only have been entitled to keep the balance. So in assessing damages they ought not to take into account the whole of that profit, but should make allowance for the obligation to pay income tax out of it." (Lord Reid at 262)
- For the individual:
- "The position with regard to an individual plaintiff is rather different. He may be entitled to very substantial damages although his income has not been affected by the libel. But if he does attempt to prove loss of income as a result of the libel, then I think that a similar direction must be given to the jury, and it may be necessary to mention surtax as well as income tax." (Lord Reid at 262)
Legislation:
Cases:
Lewis v Daily Telegraph Ltd [1964] AC 234 (HoL);
Deeny v. Gooda Walker Ltd [1996] STC 299 (HoL);
HMRC manuals:
Commentary:
See also:
- Damage to an asset
Trading
-If the asset was used in the trade, the compensation will be a receipt of the trade (but it may be a capital or income receipt).
-If it was a capital asset, compensation for the cost of restoring/fixing the capital asset is a capital receipt.
- "But where there is only a partial injury, as there was in the present case, there are necessarily two elements to be considered if the owner is to be put back, so far as money can do it, in the same position in which he would have been but for the tort feasor's wrongdoing. First, he can recover the whole cost of repair, which is without doubt a capital receipt..." (Attwool at 509).
- In Donald Fisher, CoA held that increased rent payable on an existing lease due to negligence of estate agent led to compensation that was 'for' the increased rent rather than for diminution in the capital value of the lease as a result of the increased rent. Damages at trial would have computed based on the increased rent, not diminution in value.
Legislation:
Cases:
London & Thames Haven Oil Wharves Ltd v. Attwool 43 TC 491;
Donald Fisher (Ealing) Ltd v. Spencer [1989] STC 256 (CoA);
HMRC manuals:
Commentary:
See also:
- Complete loss of a capital asset
Trading
- If a capital asset is completely destroyed, compensation for that destruction is a capital receipt, even if calculated in part by reference to the loss of profit.
- "Moreover, it appears to me, with all respect to the view of the learned Judge, that there is all the difference in the world between a total loss and a partial injury. In the case of a total loss what can be recovered from the assumed wrongdoer is the value of that which has been lost. If the thing lost is a ship or a jetty which is ordinarily used for the purpose of earning profits, the fact of its profitability is an element to be considered in assessing its capital value." (Attwool at 509)
- But note that, under a contract (e.g. a contract of insurance), the compensation may be 'for' the lost profit rather than the loss of the asset, in which case it is a trading receipt (British Columbia Fir).
Legislation:
Cases:
R v. British Columbia Fir and Cedar Lumber Co Ltd [1932] AC 441;
London & Thames Haven Oil Wharves Ltd v. Attwool 43 TC 491;
HMRC manuals:
Commentary:
See also:
- Compulsory acquisition
Trading
- As referred to above, compensation paid for the value of the asset to the owner may include loss of future profit but is a single indivisible value.
- Nevertheless, see Stoke-on-Trent CC indicating that the sum can be divided into capital and trading receipts.
Chargeable gains
- Compensation received as a result of a statutory right to compensation may be regarded as deriving from the assets taken from the claimant (Davenport v. Chilver).
- HMRC say, however (at least in respect of foreign assets): "We now take the view that there is no need to distinguish between the two types of claim so that this type of compensation should be treated as deriving from the recipient’s statutory right to make a claim even if that person was the owner of the asset." (CG13055).
Legislation:
Cases:
IRC v. Glasgow & South Western Railway Co (1887) 12 App Cas 315, HoL;
Stoke-on-Trent CC v. Wood Mitchell & Co Ltd [1979] 2 All ER 65 (CoA);
Davenport v. Chilver [1983] Ch 293 (Nourse J);
HMRC manuals: CG13055 - Compensation: compensation for deprivation of foreign assets: introduction;
Commentary:
See also:
- Loss/damage to trading stock
- Compensation for loss of or damage to trading stock is a revenue trading receipt.
- In Newcastle Breweries compensation for the compulsory purchase of the trader's stock was a revenue trading receipt. The compulsory purchase was regarded as "a sale in the business".
- See also:
- "Not merely are the profits derived from the sale of goods in which a person trades of a revenue character, but insurance monies received in respect of the loss of trade goods are proper receipts to appear in a revenue account. If a company insures its stock of goods against fire and that stock is destroyed by fire, however great and valuable it may be, the receipts must be treated in exactly the same manner as receipts from a sale of the goods would have been 'treated. The trader, it 'is true, as has been said, does not trade in fires but in goods, but if he disposes of the whole of his stock by sale or if the whole of his stock is destroyed by fire and the insurance money is received, there can be no ground for differentiating for tax purposes between the purchase money and the insurance money." (Williams's Executors at 35).
- See, to the same effect, in relation to insurance proceeds J Gliksten & Son Ltd.
Legislation:
Cases:
Newcastle Breweries Ltd v. IRC (1927) 12 TC 927 (HoL);
Green v J Gliksten & Son Ltd (1929) 14 TC 364;
CIR v. Williams's Executors (1944) 26 TC 23;
HMRC manuals:
Commentary:
See also:
- Temporary loss of use of a physical asset/land
Trading
- Negligence (tort):
- Attwool (1966) asserts the proposition that loss of use of a physical asset is actionable in its own right in the tort of negligence, even if there is no physical damage.
- On that basis, the compensation is for the loss of use not any physical damage.
- Query whether that is correct - see the law on pure economic loss.
- In particular Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27 - power cut by defendant caused loss of electricity which meant that the claimant could claim for the physical damage of a failed melt, but not the loss caused by inability to carry out four further melts in furnaces.
- Note that Spartan Steel post-dates Attwool.
- If that is correct, the compensation is for failure to receive revenue trading receipts and thus a revenue trading receipt.
- Perhaps the result would have been the same even if loss of use was not independently actionable damage, on the basis that it was nevertheless a divisible loss (albeit one that could only be recovered where associated with physical damage).
- Attwooll also says that compensation for loss of use of a vehicle used for commercial purposes was a revenue receipt (at 512).
- Contractual right to damages for temporary loss of use:
- Burmah Steam Ship - agreed contractual compensation where ship repairers exceeded the stipulated time for repair of the ship were a revenue trading receipt.
- Insurance receipts may be directly in receipt of the loss of use. See N3. Insurance proceeds.
- Some statutory schemes provide compensation for the loss of use of an asset
- Ensign Shipping Co - compensation for detention of two ships by the government during coal strikes was paid in lieu of the profits which the ships would have been earned. Held: revenue trading receipt.
Investment: same approach as trading
- "Their Lordships recognise that for some purposes in connection with income tax there may be a distinction between traders and investors and they are willing to assume that the landlords are investors for this purpose. But their Lordships are unable to see any reason of logic or principle why this distinction should be relevant to the question whether awards of damages are liable to income tax or not. There seems to be no reason why their treatment for tax purposes should depend upon whether the recipient is a trader or an investor, rather than upon the essential character of the damages themselves." (Raja's Commercial College).
Personal assets
- In Simpson v. Executors of Bonner Maurice, Rowlatt J said:
"It is exactly like damages for detention of a chattel, and unless it can be said that damages for detention of a chattel can be called rent or hire for the chattel during the period of detention, I do not think this compensation can be called interest."
- In Raja's Commercial College, UKPC agreed with this in relation to assets used personally:
"The last sentence of that passage is no doubt quite accurate in relation to chattels which, if not detained, would have been used by the owner for his own purposes but it is not applicable to chattels which the owner would have let out on hire, for example a motor-car belonging to a car rental firm or a TV set owned by a rental company." (at 322).
Legislation:
Cases:
Ensign Shipping Co Ltd v. CIR (1928) 12 TC 1169;
Simpson v. Executors of Bonner Maurice as Executor of Edward Kay (1929) 14 TC 580
Burmah Steam Ship Company Limited v. CIR (1930) 16 TC 67;
London & Thames Haven Oil Wharves Ltd v. Attwool (1966) 43 TC 491 (CoA);
Raja's Commercial College v. Gian Singh & Co Ltd [1977] AC 312 (UKPC);
Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27;
HMRC manuals:
Commentary:
See also:
- Trespass
- In Raja's Commercial College, tenants refused to leave at the end of their lease. Compensation was awarded based on the difference between the rent paid and the higher rent that could have been obtained. The compensation was a revenue receipt from the property.
- "The damages here were applicable to the purpose of filling the hole in the landlords' income caused by the fact that they were not able to obtain as much rent for the premises as they could have obtained if the tenants had not been in occupation as trespassers." (Raja's Commercial College)
Legislation:
Cases: Raja's Commercial College v. Gian Singh & Co Ltd [1977] AC 312 (UKPC);
HMRC manuals:
Commentary:
See also:
- Disturbance in connection with compulsory acquisition
- As referred to above, although the compensation for compulsory acquisition may be paid as a single, indivisible sum, representing the value of the land to the person compelled to sell, it has been held that statute (TCGA s.245) requires apportionment between sums representing the capital value and sums representing the loss of profit, e.g. caused by relocating, with the latter capable of being taxed as income.
Legislation: TCGA s.245;
Cases: Stoke-on-Trent CC v. Wood Mitchell & Co Ltd [1979] 2 All ER 65 (CoA);
HMRC manuals:
BIM40115 - Specific receipts: compensation and damages: tangible assets fixed capital;
BIM55235 - Farming: compensation for land etc acquired by public bodies;
Commentary:
See also:
- Permanent loss of use of a capital asset
Trading
- If compensation is payable for the permanent inability to use a capital asset, that is a capital receipt.
- In Glenboig Union Fireclay, a railway company exercised a statutory power to pay compensation to prevent T from exploiting a fireclay bed that lay under a railway line. The compensation was a payment 'for the sterilisation of a capital asset' and a capital receipt.
- "In truth the sum of money is the sum paid to prevent the Fireclay Company obtaining the full benefit of the capital value of that part of the mines which they are prevented from working by the Railway Company. It appears to me to make no difference whether it be regarded as a sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the Company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum of £15,316 was paid. It is unsound to consider the fact that the measure, adopted for the purpose of seeing what the total amount should be, was based on considering what are the profits that would have been earned." (at 463).
- Query whether there is a distinction between a capital asset enjoyed by consuming it (the fireclay) and a capital asset enjoyed by using it - said to be 'very different' in Attwool at 510.
- See re Associated Portland Cement Manufacturers Ltd:
- "In the former cases the mineral owner remained the owner of the minerals in question but was being prevented from turning them to profitable account. In the present case someone who is not the mineral owner is seeking to acquire minerals compulsorily from the mineral owner. In the former case the mineral owner had to be compensated, not for the loss of the minerals, but for the loss caused by the minerals being left unworked, that is his loss of profit. In the present case the respondents have to be compensated for the loss of the minerals, which constitute, so far as they are concerned, a capital asset." (at 326).
- Glenboig not referred to.
- If the compensation is paid on the basis of a temporary loss of use, but T decides to discontinue use permanently, that does not change the character of the compensation (Lang v. Rice - compensation calculated on the basis of an 18 month loss of profit, held: revenue).
Legislation:
Cases:
Glenboig Union Fireclay Co Ltd v. IRC (1922) 12 TC 427 (HoL);
re Associated Portland Cement Manufacturers Ltd [1966] Ch 308 (Buckley J);
London & Thames Haven Oil Wharves Ltd v. Attwool (1966) 43 TC 491 (CoA);
Lang v. Rice [1983] NI 205 (CoA);
HMRC manuals:
Commentary:
See also:
- Fruitless expenditure maintaining a capital asset that is subsequently sterilised/lost
Trading
- In Glenboig Union Fireclay, in addition to compensation for the sterilisation of the fireclay bed, T also recovered damages for the cost of keeping the fireclay field open during years in which a dispute over its use was resolved (T succeeded, but the railway company subsequently used a statutory power to prevent the bed being worked upon paying compensation).
- Those damages were also a capital receipt.
- The answer would have been different if the expenditure turned out to be fruitful because the capital asset could subsequently be used: "In the former case, the expenditure would be shown to form a proper trading expenditure, and to be a legitimate deduction from gross profit in estimating the 'profit arising or accruing' from the Company's trade. In the latter case, it would be shown to be money spent without the possibility of return, and would therefore constitute just a loss of so much capital." (Glenboig at 449 - Court of Session, not raised in HoL).
Legislation:
Cases: Glenboig Union Fireclay Co Ltd v. IRC (1922) 12 TC 427;
HMRC manuals:
Commentary:
See also:
- Late delivery of capital asset under a contract
Capital receipt
- Crabb v. Blue Star Line Ltd - T had an insurance policy entitling it to £500 for each day's delay in a shipbuilder delivering the new ships it ordered. It was common for T's shipbuilding contracts to provide for the purchase price to be increased in the event of early delivery and decreased in the event of late delivery, albeit that was not the case here.
- Held: the insurance sums were capital. They were not compensation for loss of profit or quantified by reference to profit. Instead, late delivery meant that the ship-builder's services were less valuable than had been contracted for.
- Equivalent to a reduction in purchase price for late delivery, which would be impossible to regard as a revenue receipt.
- No guarantee the ships would be used in T's business to produce profit (as indicated by fact that insurance not linked to lost profit).
- Burmah Steam Ship distinguished on the basis that (i) sum not calculated by reference to lost profit; and (ii) in that case, unlike the present case, T already owned the asset, whereas this was a contract to acquire an asset.
Revenue receipt
- See, for comparison, Burmah Steam Ship - agreed contractual compensation where ship repairers exceeded the stipulated time for repair of the ship was a revenue trading receipt.
Legislation:
Cases:
Burmah Steam Ship Company Limited v. CIR (1930) 16 TC 67;
Crabb v. Blue Star Line Ltd (1961) 39 TC 482;
HMRC manuals:
Commentary:
See also:
- Payment upon breach, cancellation or alteration of an ordinary trading contract
- Short Bros Ltd - T agreed to build a ship for a steamship company. Due to a slump in the shipping trade, the steamship company wanted to cancel the contract and T agreed to their cancellation in return for £100,000. T argued it was not a receipt of the trade but a receipt for not trading.
- Held: cancellation of such a contract was in the ordinary course of the trade irrespective of how common it was.
- "It seems to me that the ordinary conduct of the business of a shipbuilding company includes, not only the making of contracts for the building of ships, but the modification or alteration of those contracts."
- Kelsall Parsons: compensation for the termination of a 3 year agency contract after 2 years was a revenue trading receipt.
- Compensation for failure to supply goods that T would have disposed of as trading stock is a revenue trading receipt (Sommerfelds Ltd v. Freeman).
- Similarly, in Diamond v. Campbell-Jones damages paid to a real-estate dealer for repudiating a sale contract were a revenue trading receipt.
- Compensation for breach of a contract granting a licence to produce a play (where the grantor had already granted film rights which led to reduced profit) was revenue in Vaughan v. Parnell. Purchasing such licences was an ordinary contract/acquisition of stock in trade.
Legislation:
Cases:
Short Bros Ltd v. CIR (1927) 12 TC 955;
Kelsall Parsons & Co v. CIR (1938) 21 TC 608 (Court of Session);
Vaughan v. Parnell (1940) 23 TC 505 (Lawrence J);
Diamond v. Campbell-Jones [1961] Ch 22 (Buckley J);
Sommerfelds Ltd v. Freeman [1967] 2 All ER 143 (Plowman J);
HMRC manuals:
Commentary:
See also:
- Cancellation of a contract going to the root of the structure of T's trade
Trading
- As referred to above, in Van Den Berghs a payments for the cancellation of a contract that "related to the whole structure of the Appellants' profit-making apparatus" was capital rather than revenue.
Chargeable gains
- T will have a capital sum derived from an asset, the contractual rights, which will give rise to a deemed disposal under s.22.
Legislation:
Cases: Van Den Berghs Limited v. Clark (1935) 19 TC 390;
HMRC manuals:
Commentary:
See also:
- Negligent performance of service under contract entered into in course of trade/business
Compensation for negligent performance leading to revenue expense/loss is a revenue receipt
- Donald Fisher: Landlord served a rent review notice of increase on T which T's estate agent negligently failed to serve a counter-notice in response to, leading to rent above the market rent being payable. Lump sum compensation paid by estate agent. Held: compensation was revenue trading receipt.
- "So if one asks oneself: What was the nature of the loss for which the compensation was paid—what was it paid for; what was its purpose?—it seems to me that it was obviously paid for the increased rent which the taxpayer company had to pay as the result of the negligence. That was the basis of the tenant's claim in negligence against Mr Clay, and the payment was made to settle that claim." (at 261).
- "If the case had gone to trial instead of being compromised, I have no doubt that the measure of damages would have been assessed, as a matter of commonsense and convenience, by reference to the extra rent which the taxpayer company had to pay in consequence of the negligence and that there would have been no attempt on either side to quantify the consequences of the negligence in terms of a diminution of the value of the lease." (at 262).
- Deeny: compensation was paid by the managing agents of an insurance syndicate for their failure to exercise reasonable care and skill in conducting the underwriting business, which led to significant revenue expenses. Held: the compensation was a revenue expense.
- "If a trader employs someone to perform services for the purposes of his trade, the money which he realises from the performance of those services is a receipt of the trade. If the employee in breach of his legal duty fails to perform the services, or performs them badly, so that the trader realises less money than he would have done if they had been performed properly, he will be liable in damages and the damages will be a receipt of the trade. In each case the receipt arises out of the trade." (Deeny at 305)
Legislation:
Cases:
Donald Fisher (Ealing) Ltd v. Spencer [1989] STC 256 (CoA);
Deeny v. Gooda Walker Ltd [1996] STC 299 (HoL);
HMRC manuals:
Commentary:
See also:
- Negligent performance of a service under contract not entered into in course of trade/business
Chargeable gains
- If the negligence causes a loss/damage in respect of an asset, the damages will be a capital sum derived from that asset, giving a disposal/part disposal of the asset (s.22).
- If the negligence is in connection with an asset, but the compensation is not directly in respect of the asset, e.g. where it reflects a fall in value to an asset that remains unaltered, ESC D33 §9 permits it to be treated as derived from the asset, leading to a part disposal.
- If the negligence relates to negligent pursuit of a claim for damages where the damages would be exempt, the compensation is also exempt (ESC D33, §12).
- If the negligence relates to a contractual right, it will be a part disposal of that right.
- If the negligence does not relate to any asset other than the right of action, the concessionary exclusions in ESC D33 §11 apply/can potentially be claimed. See above.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also: ESC D33.
- Mis-selling of financial products
Trading and business
- In Gadhavi, compensation for misselling interest swaps (i) arose from the UK property business because the loans to which the swaps related were used to fund the property business; and (2) was income because the compensation was paid for a liability which was a revenue expense and properly deductible.
- "[65] ... The actual swap payments were deducted, and properly deductible, from the profits of the business. They were revenue expenses. It follows that the compensation paid by reference to those expenses must be a revenue receipt and must constitute taxable income in the hands of the Appellants."
- Similarly in Wilkinson:
- "[44] ... it is absolutely clear that the Basic Redress Element in this case was paid in order to compensate the Appellant for the fact that, by entering into the Swap as a result of Barclays’ mis-selling, the Appellant incurred more expenses than he would have done if that mis-selling had not occurred."
Interest included in compensation taxable as such
- Where compensation includes an amount calculated by time, representing a commercial rate for being deprived of funds, that is likely to be interest and taxable under ITTOIA s.369 (SAIM2075; SAIM2105).
- Interest on compensation was taxable as such in Gadhavi (§69) and Wilkinson (§68).
- HMRC guidance on determining whether interest is included at SAIM2076, SAIM2080.
- Various examples relating to PPI (payment protection insurance) at SAIM2110 onwards.
- Reimbursement of interest is not interest (SAIM2105).
Financial Services Compensation Scheme
- Interest included in awards is treated in the same way as if received from the misseller (ITTOIA s.380A; ITA s.979A; SAIM2085).
- Not all types of compensation are included (SAIM2095).
Chargeable gains
- Compensation received for misselling is a capital sum derived from the right of action (unless there is an underlying asset).
- ESC D33, §11 exemption available/can be claimed - see above.
Missold personal pensions etc. (exemption)
- "FA96/S148 and ESC A99 between them exempt compensation for mis-sold personal pensions, retirement annuities and free-standing additional voluntary contributions from income tax where the necessary conditions are satisfied. The exemption extends to interest included in such payments." (SAIM2075 see further at SAIM2340).
- Also applies to capital gains tax
London Capital & Finance compensation scheme exemption
- See CG13085.
Legislation: ITTOIA s.369, s.380A; ITA s.979A;
Cases:
Gadhavi v. HMRC [2018] UKFTT 600 (TC), Judge McKeever;
Wilkinson v. HMRC [2020] UKFTT 362 (TC), Judge Beare;
HMRC manuals:
CG13080 - Compensation: Mis-sold pensions;
CG13083 - Compensation: Mis-sold pensions: statutory exemption;
SAIM2075 - Interest: Compensation: background and examples;
SAIM2085 - Interest: interest payable from the Financial Services Compensation Scheme;
SAIM2105 - Interest: payment protection insurance (PPI) compensation;
Commentary:
See also:
- Wrongful dismissal
Employment
- Not taxable as general earnings, but taxable under s.401 save for the £30,000 exemption.
- See above.
Capital gains tax
- The amount chargeable to income tax is excluded (TCGA 1992, s.37).
- Query whether the fact that £30,000 would be chargeable apart from the exemption brings it within s.52(2).
Legislation: TCGA 1992, s.37; s.52;
Cases:
HMRC manuals:
Commentary:
See also: