Receipts of compensation and damages are often associated with capital items which must be treated as capital receipts rather than trading income. Some of the different scenarios of compensation and damages and relevant cases in this area are set out below.
Amounts received for not using assets — capital asset
The tax treatment of amounts received for ceasing to use an asset will depend on whether the nature of the asset and the way it is being used in the trade. If the compensation comes from an asset which is a tangible fixed asset then the amount would be capital, conversely an amount received for an asset used for the trade, a current asset, would be a revenue amount, see B2.203 for the difference between fixed and current assets.
In Glenboig Union Fireclay Co Ltd1 the appellant traded as a manufacturer of fireclay goods and merchant of raw fireclay. The company also leased fireclay fields in the neighbourhood of a railway. A dispute arose with the railway company as to the right to work the fields
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