Chapter BIM35600
| Published date | 22 November 2013 |
| Record Number | BIM35600 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
The treatment of sums paid (or received) for refraining from carrying on trade operations depends on the circumstances of the payment, the nature of the asset and of the trade. If the compensation derives from a capital asset then it will be capital; if from a revenue matter, then the compensation will be on revenue account.
In the case of The Glenboig Union Fireclay Co Ltd v CIR [1922] 12TC427 a railway company took legal action to prevent the extraction of fireclay from beds under its track. The action was unsuccessful and the railway company paid the fireclay company a sum of money to refrain from working under the track, to ‘sterilise’ that particular asset.
The Special Commissioners determined that the sum received by the fireclay company was a capital receipt and not taxable as a receipt of the company’s trade. The courts agreed.
Lord Wrenbury explained the decision at page 465:
‘Was that compensation profit? The answer may be supplied, I think, by the answer to the following question: Is a sum profit which is paid to an owner of property on the terms that he shall not use his property so as to make a profit? The answer must be in the negative. The whole point is that he is not to make a profit and is paid for abstaining from seeking to make a profit…It was the price paid for sterilising the asset from which otherwise profit might have been obtained.’
You should recognise that the asset in Glenboig was a capital asset, the fireclay bed. Glenboig did not trade in fireclay beds.
Where the asset in question is a trading asset the outcome is different. This again emphasises the importance of establishing the taxpayer’s trade - see BIM35428. In Johnson v W S Try Ltd [1946] 27TC167 the company, which operated a trade of building and development, received compensation under legislation designed to curtail so-called ribbon development. The sum was held to be a trading receipt. There was a subsidiary point as to the year in which the receipt was to be taxed; was it the year when the planning authority first refused permission to develop the land or was it the year when the company received the compensation. Macnaghten J at pages 172 and 173 explained why the compensation was taxable:
‘Although in most cases land belonging to a trading company forms part of its capital assets, in the case of a company engaged in ribbon development the land which is acquired for the purposes of such development is not part of its capital. In such a case the land forms part of its stock-in-trade, just as much as the materials which it buys for the purpose of erecting the buildings on it. The cost of the land must come into its trading account as a trading expense. If it sells the land the price must come into its trading account as a trading receipt. And, likewise, compensation for injurious affection must also, in my opinion, be regarded as a trading receipt.’
In Shadbolt v Salmon Estate (Kingsbury) Ltd [1943] 25TC52 a building company was compensated for the withdrawal of planning permission for building plots that it...
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