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Compensation Payment held to be Taxable!

Compensation Payment held to be Taxable!

The First-tier Tribunal has held, in the case of John Lints (TC2168), that a compensation payment received by a taxpayer was to be treated as taxable business income.

The taxpayer practiced as a solicitor and had an office on the projected route of the new Edinburgh tramway system.

Pursuant to Edinburgh’s small business additional support scheme, the taxpayer received a payment of £4,000 in order to compensate him for disruption caused from the tramway’s construction.

HM Revenue and Customs (HMRC) took the position that the payment should be treated as a revenue receipt of the taxpayer’s practice. Although the payment was unsolicited and voluntarily in nature this was, in the view of HMRC, completely irrelevant.

The City’s explanatory leaflet (which accompanied the payment) did specifically refer to “business interests” and was made in order to compensate a party for potential business disruption. HMRC claimed that it was linked to the turnover of the business and should, therefore, be taxed as such.

The taxpayer argued that the sum was simply a voluntary gift and recompense for inconvenience and losses and was not in the nature of income. The taxpayer further argued that no publication concerning the proposed scheme referred to compensation for loss of business and nor was there was any requirement for the taxpayer to show trading difficulties (and, therefore, an adverse business impact from the construction) in order to qualify for the payment.

The First-tier Tribunal considered the scheme and concluded that the payment was a surrogatum for business turnover. The judge made specific reference to the scheme being aimed at businesses, not private individuals, and the expense of cleaning up after the tramway works would be revenue in nature.

Accordingly, the First-tier Tribunal held that the payment should be treated as income of the business and, therefore, taxable.

The taxpayer’s appeal was dismissed.

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