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If a company is awarded damages for loss of profit, should

Customer Question

If a company is awarded damages for loss of profit, should the Court award be net of tax or gross (and then subject to tax in the usual way with the Revenue)?
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

In general terms this is the rule:

'A starting point is to consider the nature of the damages and what they are intended to compensate. As a general rule, damages are treated for tax purposes in the same way as a payment that would have been received or generated but for the event which gave rise to the compensation. If the damages rectify a gap in trading profits or revenue profits, they are likely to be income receipt, whereas if damages rectify a business’s capital base, they are likely to be capital receipt.'

In this case the award is in respect of a loss of profit and thus is taxable as income for Corporation Tax (CT) tax purposes. Furthermore:

'VAT treatment of damages

On the subject of VAT treatment of damages, it is worth noting that damages are normally outside the scope of VAT, however, in some circumstances VAT must be sought on top of the damages in cases where the damages represents consideration for supply of goods or service on which VAT must be paid.'

It would appear that damages, which are normally paid gross of Income/Corporation Taxes, must be inflated by whatever VAT is due presuming the company is registered for this tax.
Customer: replied 3 years ago.

So it is not for the judge to deduct tax?

Expert:  bigduckontax replied 3 years ago.

The judge may give directions on this matter as advice, but how the damages are paid will be subject to the normal rules in such cases.

bigduckontax, Accountant
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.

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