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HMRC internal manual

Business Income Manual

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Specific receipts: compensation and damages: capital or revenue: summary

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

Identify the reason for which the compensation/damages was paid

In the instructions that follow, some guidance is given about particular circumstances. For example if the receipt is referable to:

  • specific tangible fixed or circulating assets used in the trade (see BIM40115)
  • cancellation, breach or variation of a trading agreement (see BIM40120)
  • reimbursement of trading expenses (see BIM40130)
  • compensation for loss of office (see BIM40135)

In some instances, however, an amount of damages or compensation may not have any readily identifiable label. The outcome may not turn on a particular test and any of the factors considered under the above headings might be relevant, as well as those general principles that affect all receipts.

At one end of the spectrum, an amount received by a trader in consideration of the cessation, in whole or in part, of his business may be a capital receipt. Though not strictly a ‘compensation case’, Evans Medical Supplies Ltd v Moriarty [1957] 37 TC 540 (see BIM35705) is a good illustration of the principles involved. The more recent cases of A Consultant v HMIT [1998] SpC180 and The Croydon Hotel and Leisure Company Ltd v Bowen [1996] SpC101 (both discussed in BIM35535) indicate the severity of the test to be met for a finding of capital.

On the other hand, compensation in respect of some interference with the business itself (as distinct from interference with a particular asset - BIM40115 refers) which does not involve cessation may, in certain circumstances, fall to be regarded as a trading receipt. An example of this type of payment is one made for an ascertained deficiency of profits incurred by the trader during a period of Government control of the business (see Charles Brown & Co v CIR [1930] 12 TC 1256).

If, on a proper analysis of the circumstances, a payment is made to compensate a trader for loss of profits (as distinct from loss of profits being simply how the payment is measured) then it is likely to be a trading receipt (see Lang v Rice [1983] 57 TC 80; Donald Fisher (Ealing) Ltd v Spencer [1989] 63 TC 168).