Is compensation taxable? - 2nd pair of eyes needed
Discussion
Hi,
Been looking into this recently as I am due damages based compensation soon and trying to figure out how to go about making the funds as faff free as possible. I have seen on the gov website:
For slight backstory, my IP was infringed in a massive way, the fees payable have been reasonably calculated with my IP specialist and have been passed to the infringer's party. I was infringed as a single individual citizen, not as a business entity, even though I am a sole trader, the IP infringed had no business activity associated with it.
https://www.gov.uk/hmrc-internal-manuals/business-...
The section in question:
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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. However, payment made to the trader as a personal matter rather than in his capacity as a trader is unlikely to be chargeable. For instance, the following receipts are unlikely to be trading receipts:
> Unsolicited sums which the payer is under no legal obligation to make, which might include payment for a testimonial or compensation for injured feelings, albeit with compensatory elements (see BIM41800 onwards).
> 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 ER 796.
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That because it is a personal damages based compensation payment, that it doesn't count as a business receipt and isn't taxable. Am I reading that right? So once my lawyer deposits the funds into my account and my bank then rings me to ask if everything is OK (lol) I can then do with it as I please.
Cheers!
Been looking into this recently as I am due damages based compensation soon and trying to figure out how to go about making the funds as faff free as possible. I have seen on the gov website:
For slight backstory, my IP was infringed in a massive way, the fees payable have been reasonably calculated with my IP specialist and have been passed to the infringer's party. I was infringed as a single individual citizen, not as a business entity, even though I am a sole trader, the IP infringed had no business activity associated with it.
https://www.gov.uk/hmrc-internal-manuals/business-...
The section in question:
---
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. However, payment made to the trader as a personal matter rather than in his capacity as a trader is unlikely to be chargeable. For instance, the following receipts are unlikely to be trading receipts:
> Unsolicited sums which the payer is under no legal obligation to make, which might include payment for a testimonial or compensation for injured feelings, albeit with compensatory elements (see BIM41800 onwards).
> 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 ER 796.
---
That because it is a personal damages based compensation payment, that it doesn't count as a business receipt and isn't taxable. Am I reading that right? So once my lawyer deposits the funds into my account and my bank then rings me to ask if everything is OK (lol) I can then do with it as I please.
Cheers!
Place zero reliance on internal HMRC manuals, it is a matter of precedent that what they say is not advice but almost internal musings of HMRC
That may not change the answer but as a sole source, risky.
I recall once a senior tax lawyer mentioned to me as an aside that damages were not taxable but ours were in a business and we just treated them as a receipt of money.
Depending on the sums, if it were me, I’d look on Bar Direct for a decent Tax Barrister, I’ve used Bar Direct a few times and so long as you can layout your request in an intelligent way, they are cost effective
I got an opinion via a solicitor and we did everything except put the pages in one pdf, we paid £3,500.
We needed another matter and went direct to the Barrister, £1100
Again depends on amounts involved but it is not strictly an accounting matter so a legal perspective might be better
Or
Search on Google as a lot of firms do publicise cases and you can get some insight there
That may not change the answer but as a sole source, risky.
I recall once a senior tax lawyer mentioned to me as an aside that damages were not taxable but ours were in a business and we just treated them as a receipt of money.
Depending on the sums, if it were me, I’d look on Bar Direct for a decent Tax Barrister, I’ve used Bar Direct a few times and so long as you can layout your request in an intelligent way, they are cost effective
I got an opinion via a solicitor and we did everything except put the pages in one pdf, we paid £3,500.
We needed another matter and went direct to the Barrister, £1100
Again depends on amounts involved but it is not strictly an accounting matter so a legal perspective might be better
Or
Search on Google as a lot of firms do publicise cases and you can get some insight there
Interesting question.
It sounds like the OP has been compensated for the financial value of his IP, what he could have sold the IP for, so it might be reasonable and logical for the compo to be taxable in some way.
But reasonable and logical and tax don't always go together.
How it might be taxed, also an interesting question, selling your IP can be more like selling a capital item, or IP you've created can be like being an artist or author, and they, AFAIK can have special tax arrangements.
The fact that the OP was not actively 'in business' with his IP doesn't mean it's not as 'business' matter.
There are some tax people on the Contractor UK forum who may shed a little light? Although it's mostly IT day rate bods, there are some people with IP based business on there, and tax/accountancy types who work with them.
It sounds like the OP has been compensated for the financial value of his IP, what he could have sold the IP for, so it might be reasonable and logical for the compo to be taxable in some way.
But reasonable and logical and tax don't always go together.
How it might be taxed, also an interesting question, selling your IP can be more like selling a capital item, or IP you've created can be like being an artist or author, and they, AFAIK can have special tax arrangements.
The fact that the OP was not actively 'in business' with his IP doesn't mean it's not as 'business' matter.
There are some tax people on the Contractor UK forum who may shed a little light? Although it's mostly IT day rate bods, there are some people with IP based business on there, and tax/accountancy types who work with them.
The OP is a photographer, if this matter is in anyway related to images then it is impossible to say it is not business related, whether anyone would ever know or find out is a different matter completely
Again insured advice is preferable and ultimately could be good news and allow a peaceful mind.
I have found over the years where uncertainty exists, for me, it is very distracting.
Again insured advice is preferable and ultimately could be good news and allow a peaceful mind.
I have found over the years where uncertainty exists, for me, it is very distracting.
Yes indeed it is the uncertainty. And indeed I am a photographer by hobby and by merit, profession too. But the image that was infringed was not something I created for a business purpose, nor was it ever intended to be sold. It was something I created and shared on my social media only because it was simply fun one day whilst on a day trip with friends.
The compensation is a result of the damages done to my wellbeing and character as a result of it being used, modified and globally distributed without my knowledge or permission - Hence my OP citing the gov section which references this specific circumstance where a personal level of damage is compensated for.
In specific this key line where they say it would not be taxable:
"Compensation for personal injury to a trader, even if the sum is measured by reference to loss of earnings or earning power."
I think you guys are sound in that insured advice is best course of action. Even if that advice costs me a bit of money, the compensation value itself is high enough that it's a small drop for the air tight peace of mind!
Many thanks.
Edit*
I guess this could easily be answered by my IP lawyer who has been handling my infringement case, they will also be handing me my funds after taking their % and will have experience in this sort of situation so I will level with them first and go from there!
The compensation is a result of the damages done to my wellbeing and character as a result of it being used, modified and globally distributed without my knowledge or permission - Hence my OP citing the gov section which references this specific circumstance where a personal level of damage is compensated for.
In specific this key line where they say it would not be taxable:
"Compensation for personal injury to a trader, even if the sum is measured by reference to loss of earnings or earning power."
I think you guys are sound in that insured advice is best course of action. Even if that advice costs me a bit of money, the compensation value itself is high enough that it's a small drop for the air tight peace of mind!
Many thanks.
Edit*
I guess this could easily be answered by my IP lawyer who has been handling my infringement case, they will also be handing me my funds after taking their % and will have experience in this sort of situation so I will level with them first and go from there!
Edited by robbiekhan on Tuesday 6th September 10:35
Interesting question.
It sounds like the OP has been compensated for the financial value of his IP, what he could have sold the IP for, so it might be reasonable and logical for the compo to be taxable in some way.
But reasonable and logical and tax don't always go together.
How it might be taxed, also an interesting question, selling your IP can be more like selling a capital item, or IP you've created can be like being an artist or author, and they, AFAIK can have special tax arrangements.
The fact that the OP was not actively 'in business' with his IP doesn't mean it's not as 'business' matter.
There are some tax people on the Contractor UK forum who may shed a little light? Although it's mostly IT day rate bods, there are some people with IP based business on there, and tax/accountancy types who work with them.
It sounds like the OP has been compensated for the financial value of his IP, what he could have sold the IP for, so it might be reasonable and logical for the compo to be taxable in some way.
But reasonable and logical and tax don't always go together.
How it might be taxed, also an interesting question, selling your IP can be more like selling a capital item, or IP you've created can be like being an artist or author, and they, AFAIK can have special tax arrangements.
The fact that the OP was not actively 'in business' with his IP doesn't mean it's not as 'business' matter.
There are some tax people on the Contractor UK forum who may shed a little light? Although it's mostly IT day rate bods, there are some people with IP based business on there, and tax/accountancy types who work with them.
robbiekhan said:
In specific this key line where they say it would not be taxable:
"Compensation for personal injury to a trader, even if the sum is measured by reference to loss of earnings or earning power."
Personal injury damages are not subject to tax - but that goes hand in hand with the rule that if the damages are not taxable then there is notional tax deducted when calculating the damages. So this would only help if notional tax was deducted when calculating damages. Which it sounds like it wasn’t "Compensation for personal injury to a trader, even if the sum is measured by reference to loss of earnings or earning power."
Edited by robbiekhan on Tuesday 6th September 10:35
That doesn’t mean the damages are taxable though - but it sounds like you are in such an unusual position that you need to get advice from someone
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