BIM40120 - Receipts: compensation & damages: intangible assets

Trading contracts

The normal situation

Ordinarily, an amount received by a trader in consideration of the cancellation, breach or variation of a trading contract will be a revenue receipt. For example:

• Compensation and damages relating to a contract for the purchase or sale of trading stock or consumables (Short Bros Ltd v CIR [1927] 12TC955 (see BIM35600), George Thompson & Co. Ltd v CIR [1927] 12TC1091; Green v J Gliksten & Son Ltd [1929] 14TC364; Bush, Beach & Gent Ltd v Road [1939] 22TC519; Creed v H & M Levinson Ltd [1981] 54TC477).
• If business is carried on by operating as agent for a number of manufacturers and the receipt is referable to one such contract (Kelsall Parsons & Co. v CIR [1938] 21TC608 (see BIM35530); CIR v Fleming & Co (Machinery) Ltd [1951] 33TC57; CIR v David C MacDonald & Co [1955] 36TC388; Wiseburgh v Domville [1956] 36TC527; Fleming v Bellow Machine Co. Ltd [1965] 42TC308; Elson v James G Johnston Ltd [1965] 42TC545).

Exception

If however, the compensation refers to one contract which is so dominant that its loss accounts for substantially the whole of the company's trade (Barr, Crombie & Co. Ltd v CIR [1945] 26TC406 (see BIM35530)) or the contract regulates the whole structure or framework of the trade (Van den Berghs Ltd v Clark [1935] 19TC390 (see BIM35530)); Sabine v Lookers Ltd [1958] 38TC120) then, exceptionally, the receipt may be properly viewed as capital in nature (and possible CGT liability would then have to be considered).