BIM40105 - Receipts: compensation & damages: is it a trade receipt

The receipt must represent a ‘profit’ of the trade

You should not assume that an incoming is a trade receipt solely because nothing would have been received had the trade not been carried on. The receipt must represent a profit ‘arising from' the trade (ICTA88/S18 (1) for CT and ITTOIA05/S5).

If a sum, resulting from a claim to compensation or damages, is referable to trading operations then it will normally be a trade receipt. This will be so even if the payer's legal liability is never established. But payment made to the trader as a personal matter rather than in his capacity as a trader is unlikely to be chargeable; for instance:

1. Unsolicited sums in the nature of a testimonial or a solatium, albeit with compensatory elements, may not amount to trade receipts - see BIM41800 onwards.
2. Compensation for personal injury to a trader, even if the sum is measured by reference to loss of earnings or earning power. Thus, damages received for such personal injuries should not be included in the computation of professional or trading receipts, even sums calculated by reference to the loss of income already sustained, or the loss of future earning power. In such cases, because the receipt in the form of compensation is not taxable, it is the practice of the courts, in calculating amounts referable to the loss of earnings, to treat the compensation as if paid net of the tax liabilities that would have arisen had the individual not suffered injury and the consequent income loss. This is called the ‘Gourley principle' after the leading case in the field, British Transport Commission v Gourley (1955) 3 All ER796.

It is emphasised that (b) above only applies to injuries suffered by the ‘proprietor' of the business. It does not apply to compensation received to compensate a trader for an injury to an employee, nor payments to companies; see the guidance on insurance premiums at BIM45500 onwards.

Savings and Investment Income and Miscellaneous Income

If the compensation is not taxable as trading income because it does not arise from the trade, you should consider whether any liability arises under Savings and Investment Income (IM1500 onwards), Miscellaneous Income (BIM80100 onwards), any other charging provisions or CGT.