BIM40115 - Receipts: compensation & damages: tangible assets fixed capital

Damage to fixed or circulating capital?

A payment received in respect of the permanent loss, deprivation or ‘sterilisation' of a fixed capital asset of the business ranks as a capital receipt (see The Glenboig Union Fireclay Co. Ltd v CIR [1922] 12TC427 - see BIM35600). In contrast, a payment that is compensation for some temporary interference with the trader's use of such an asset is a trading receipt (see Sutherland v CIR [1918] 12TC63; Ensign Shipping Co. Ltd v CIR [1928] 12TC1169; Burmah Steam Ship Company Ltd v CIR [1930] 16TC67 - see BIM35475).

Compensation for loss of or damage to a fixed capital asset will often include an element referable to the effect on trading income. Depending on the particular facts, the compensation may be broken down into its component parts so that the ’income' and ‘capital' elements are separated, and income tax charged on the former. Examples of this include:

• London & Thames Haven Oil Wharves Ltd v Attwooll [1966] 43TC491 (see BIM35600) in which it was held that, on the 'particular facts, to the extent that compensation exceeded the cost of repairing the physical damage, it was for loss of profits and taxed as a revenue receipt.

SP8/79(Compensation for acquisition of property under compulsory powers)

• City of Stoke-on Trent v Wood Mitchell & Co. Ltd (a Lands Tribunal case heard in the Court of Appeal and reported at [1979] STC197; [1980] 1WLR254; [1979] 2 All ER65) which concerned compensation in respect of compulsory purchase under the Land Compensation Act 1961. The compensation included £12,228 for loss of profits and it was held that the effect of what is now TCGA92/S245 was to permit the receipt to be broken down into its component parts. Following this decision SP8/79 dated 18 June 1979, was issued - it is reproduced at CG72150.

Circulating capital

Compensation referable to the loss or deprivation of circulating assets is invariably a trading receipt; see as regards trading stock, Green v J Gliksten & Son Ltd [1929] 14TC364; CIR v Newcastle Breweries Ltd [1927] 12TC927; and as regards consumable stores, George Thompson & Co. Ltd v CIR [1927] 12TC1091.