CheckLists.Tax (beta)
N6. Payment of compensation/damages
INCOME TAX
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Trading deduction
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- Damages paid as a result of normal trading operations usually allowable
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- If the liability to pay damages arises through activities pursued for the purpose of earning profit of the trade, a deduction for that liability should be allowable (even if the liability was not consciously incurred).
- HMRC accept that damages incurred as a result of normal trading operations are allowable (BIM38510).
- In Strong v. Woodfield damages paid to a customer of an Inn who was injured when a chimney fell on the customer whilst they were sleeping at the Inn were disallowed.
- It was said that the expenditure did not fall on the trader in their capacity as a trader, but instead as a householder.
- That distinction seems unconvincing given that the injured party was sleeping in the Inn as a customer.
- Accepted that compensation to a rail passenger for an accident whilst travelling would be deductible.
- HMRC do not appear to apply the decision broadly: "Notwithstanding the above decision, you should allow a trader the costs of civil damages for injury to others caused by day to day trading operations" (BIM38510).
- Golder: Costs and compensation of settling a claim for fraud arising out of T's trade of promoting companies were deductible as the claim arose out of the trade and would seriously affect its reputation as a company promoter if it succeeded. T decided to settle in light of the costs of defending the case.
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Damages for fraud
- Query whether there is a public policy prohibition on deduction of damages paid following a finding of fraud.
- In Golder the possibility was raised but not applied because T settled before any decision on the claim.
- See below on damages arising outside the normal course of the trade.
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Legislation:
Cases:
Strong and Company of Romsey Limited v. Woodfield (1906) 5 TC 215 (HoL);
Golder v. Great Boulder Proprietary Gold Mines Ltd [1952] 1 All ER 360 (Donovan J);
HMRC manuals: BIM38510; BIM38540;
Commentary:
See also:
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- Damages connected to trade but arising outside of normal course not allowable
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- Fairrie v. Hall - T, a sugar broker, accused a rival of abusing his position as deputy director of sugar supplies to advance the interests of his own company. The rival successfully sued for malicious libel. Held: No deduction. The damages and costs were only remotely connected to T's trade as a sugar broker.
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Legislation:
Cases:
Fairrie v. Hall [1947] 2 All ER 141 (MacNaghten J);
HMRC manuals: BIM38530;
Commentary:
See also:
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- Removal of onerous employee - deductible (even if purpose includes avoiding negative publicity)
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- BW Noble Ltd v. Mitchell - T might have been justified in dismissing director, but to avoid publicity injurious to T's reputation, entered into negotiations for the director to retire. Director claimed compensation and compromise was reached in satisfaction of all claims.
- Held: the payment was (i) for the benefit of the trade; (ii) wholly and exclusively so; (iii) revenue rather than capital.
- "It seems to me that the directors had to handle a situation of both delicacy and gravity, and, their bona fides not being questioned, it is clear that they took a course which they were justified in taking and made a payment in the interests of the carrying on of their trade." (at 420).
- Noted by analogy in Williams's Executors.
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Legislation:
Cases:
BW Noble Ltd v. Mitchell (1927) 11 TC 372 (CoA);
CIR v. Williams's Executors (1944) 26 TC 23 (HoL);
HMRC manuals:
Commentary:
See also:
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