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HMRC internal manual

Business Income Manual

Specific deductions: compensation & damages: capital

Brief outline of what to consider to determine if the payments is capital

A payment of compensation or damages may give rise to a capital asset or advantage where:

(a) it is part of a transaction for purchase of shares or a business (see BIM42955)

(b) it is connected with the acquisition, disposal, improvement or modification of a fixed capital asset

The compensation or damages which fall into category (b) includes a payment to get rid of a disadvantageous capital asset. See Tucker v Granada Motorway Services Ltd [1979] 53 TC 92 (see BIM35320), Walker v The Joint Credit Card Co Ltd [1982] 55 TC 617 (see BIM35510), Mallett v Staveley Coal & Iron Co Ltd [1928] 13 TC 772 (see BIM35625) and Cowcher v Richard Mills & Co Ltd [1927] 13 TC 216 (see BIM35625).

However, where a compensation payment incurred in the normal course of trading relates, for instance, to a trading contract and is not in connection with an identifiable capital asset, it will be an allowable deduction. See Anglo Persian Oil Co Ltd v Dale [1927] 16 TC 253 (see BIM35505), Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd ([1964] AC 948 (PC), see BIM35635) and Walker v Cater Securities Ltd [1974] 49 TC 625.