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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Specific receipts: compensation and damages: other than trading contracts

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

Relevant considerations

The decisions in the following cases help to illustrate some of the relevant considerations:

  • you should regard compensation for loss of profits due to negligence as a trading receipt, whether or not there is a contractual relationship between the parties. Compensation received from professional advisers was treated as such in Gray v Lord Penrhyn [1937] 21 TC 252 and Donald Fisher (Ealing) Limited v Spencer [1989] 63 TC 168
  • compensation on the requisition of stock by a public authority was, the element of compulsion notwithstanding, held to be a trading receipt in CIR v Newcastle Breweries Ltd [1927] 12 TC 927
  • compensation in return for accepting some restriction to the scope of the business activities (restrictive covenants) was held to be capital in Margerison v Tyresoles Ltd [1942] 25 TC 59 and Higgs v Olivier [1952] 33 TC 136 (see BIM35600)
  • by way of contrast, payments made under European Commission schemes in order to induce farmers to change from one form of production to another were held to be revenue receipts in White v G & M Davies [1979] 52 TC 597 (see BIM35600) and CIR v Biggar [1982] 56 TC 254 (see BIM35600), even though the scheme involved restrictions on the farming activities