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TaxRobin
TaxRobin, Tax Consultant
Category: Tax
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Experience:  International tax
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Is tax payable on a trading limited company in respect of compensation

Resolved Question:

Is tax payable on a trading limited company in respect of compensation received for disturbance and loss of light. There were building works going on next door to the company for a number of months which was blocking their natural light and the company received a substantial sum in compensation.
Submitted: 3 years ago.
Category: Tax
Expert:  TaxRobin replied 3 years ago.
Hello,
Your situation can be tricky. If a sum, resulting from a claim to compensation or damages, is referable to trading operations then it will normally be a trade receipt. This will be so even if the payer's legal liability is never established. However, payment made to the trader as a personal matter rather than in his capacity as a trader is unlikely to be chargeable.
If the compensation was to make right lost revenue from the outage then yes, it is taxable.
You would need to have your solicitor define the agreement exactly for you and the verbage used in the agreement.
Customer: replied 3 years ago.

The compensation was for disturbance and loss of light. Therefore, is it taxable on the company?

Expert:  TaxRobin replied 3 years ago.
If the payment was meant to compensate for the lost revenue then yes, it is taxable.
When considering the character of a compensation receipt, you should begin by asking two questions:

is it a receipt of the trade or does it arise outside the trade, and
if it is a receipt of the trade, is it capital or revenue?

It is revenue and as it is arising inside the trade it is taxable.

This payment was not for any physical injury but to compensate for the disruption of trade.
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