Home› For accounting professionals› Tax
Current updates regarding coronavirus (Covid-19) and the precautions AAT are taking will be continually updated on the below page.

Please check this link for the latest updates:
We hope you are all safe and well and if you need us we will be here. 💚


Out of court settlement - taxable?

MonsoonMonsoon Font Of All KnowledgeFMAAT, AAT Licensed Accountant Posts: 4,071
in Tax
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

Comments

  • MoneySavingBankMoneySavingBank Well-Known Registered Posts: 143
    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 :D

    Ta
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    Sorry, should have been more specific. It's the corporation tax position I'm unsure of, not the VAT.
  • burgburg Experienced Mentor GloucesterModerator, FMAAT, AAT Licensed Accountant Posts: 1,441
    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???!
    Regards,

    Burg
  • RacheyRachey Experienced Mentor Registered Posts: 589
    burg wrote: »

    Where's Dean???!

    Probably under a bridge killing some trolls..... Hahaha you got to love Dean!! :)
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    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....!!
  • deanshepherddeanshepherd Font Of All Knowledge Registered Posts: 1,809
    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.
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    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!
  • burgburg Experienced Mentor GloucesterModerator, FMAAT, AAT Licensed Accountant Posts: 1,441
    deanshepherd wrote: »
    On paternity leave!

    Congratulations Dean!
    Regards,

    Burg
Sign In or Register to comment.