Out of court settlement - taxable?

Monsoon

Round numbers for simplicity:

Ltd Co sues supplier for refund of costs £1000, plus loss of earnings (quantifiable) £20,000.

Supplier pays £5000 in out of court settlement, Ltd Co accepts (a bird in the hand...).

Is it all taxable?

Is it partly taxable (£1000 as refund is Cr Expense, £4000 damages not taxable)?

Or is it all non-taxable?

Many thanks

MoneySavingBank

Hello Monsoon

I am not very sure but I believe the whole 5k is taxable.

It can have two forms:

1. 5k VAT included
2. 5k + VAT

Again it depends. It's better if you get the second one

Ta

Monsoon

Sorry, should have been more specific. It's the corporation tax position I'm unsure of, not the VAT.

burg

I am with the view of it's all taxable as it is effectively to cover the loss of earnings that the company would have had, had everything gone as planned. i.e. if the original transactions took place they would have been taxed on the income. This is just in effect instead of the transactions taking place.

I sort of see it like an insurance payout in the respect that it would be taxable but there are usually expenses to offset against. If however slightly more payout is received than the expenditure then this would be taxable.

Where's Dean???!

Rachey

burg wrote: »

Where's Dean???!

Probably under a bridge killing some trolls..... Hahaha you got to love Dean!!

Monsoon

Thanks

Ian I agree, someone on Aweb linked me to this
http://www.hmrc.gov.uk/manuals/bimmanual/BIM40105.htm

I suck at searching the manuals, I did look....!!

deanshepherd

burg wrote: »

Where's Dean???!

On paternity leave!


But whilst I'm here..

..as far as I am aware, only compensation for loss of earnings relating to a personal injury are exempt from tax because any award is treated as being calculated at the 'after tax' amount.

For a limited company, any dispute with a supplier which results in compensation (whether awarded in court or not) would usually be a trade receipt and hence taxable, regardless of the split between costs and damages.

Compensation is outside the scope of VAT.

Monsoon

Congrats Dean! Hope you're enjoying your paternity leave

Thanks for the reply, that agrees with what I've read, and makes sense too. Ta!

burg

deanshepherd wrote: »

On paternity leave!

Congratulations Dean!