Chapter BIM35427

Published date22 November 2013
Record NumberBIM35427
CourtHM Revenue & Customs

You should be careful not to confuse the method of computing the quantum of damages with the subject for which compensation is paid. You need to determine if the reason for paying damages was, for example, the loss of a capital asset or, for example, a restriction on trading activities.

In the case of Burmah Steam Ship Co Ltd v CIR [1930] 16TC67 the owners contracted for repairs to a second-hand vessel. The ship repairer exceeded the agreed time for the overhaul and damages were paid to cover the consequential loss of expected profits had the vessel been available for trade.

The Special Commissioners decided that the compensation received should be included as a trading receipt of the ship owner. The courts concurred.

At page 71 the Lord President (Lord Clyde) drew a distinction between filling a hole in the trader’s profits and filling a hole in the trader’s assets. A sum received to compensate for loss of profits would be chargeable as trading income. A sum received to compensate for loss of a capital asset would be a capital receipt outside the scope of the charge of income tax:

‘Suppose someone who chartered one of the appellant’s vessels breached the charter and exposed himself to a claim of damages at the appellant’s instance, there could, I imagine, be no doubt that the damages recovered would properly enter the appellant’s profit and loss account...

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