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HMRC internal manual

Business Income Manual

Specific receipts: compensation and damages: introduction

S5 Income Tax (Trading and Other Income) Act 2005, S35 Corporation Tax Act 2009

The basic approach

When considering the character of a compensation receipt, you should begin by asking two questions:

  • is it a receipt of the trade or does it arise outside the trade
  • if it is a receipt of the trade, is it capital or revenue.

To answer these questions you need to establish for what the compensation actually was received. This may require a good deal of research. In particular, it is important not be misled by labels. You should consider all of the surrounding circumstances. You should examine the formal documentation such as contracts and any correspondence between the parties and their representatives. This may however, not tell the whole story and, where appropriate, you should request a meeting with those who sought or negotiated the compensation should in order to establish whether the documentation fully reflects what happened. It may also be useful to liaise with the payer’s office.

As regards the treatment of compensation payments to:

  • farmers for disturbance or for compulsory acquisition of land, etc (see BIM55220 - BIM55240)
  • licensee tenants of public houses on loss of tenancy (see CG72450 onwards)
  • a person who has made an election to compute the profits of their trade on the cash basis, see BIM70020.

For compensation payments that take the form of Government etc grants, see BIM40450 onwards.