HMRC and CAs only?

Question

I'm involved with a loss of earnings claim, and the other side's accountants want to deduct tax and NIC from the compensation award, quoting IM361 and the Gourley case in support.
I agree this applies to awards by the Courts, but not to insurance company payouts. I have never accepted such deductions in the past. I think BIM 40105 and BIM 40751 are relevant, and the loss of earnings should be paid gross and the recipient should account for tax and NIC.

What say you?

Thanks for the opinions so far.
The claim is in respect of loss of earnings (which may include personal injury, but no specific claim has been made for this).

Every other claim I've been involved in has been paid gross and the loss of earnings(at the insistence of HMRC) has been included as takings because the expenses of the business continued throughout the period of the claim.
I can understand the Court's reasoning, but an insurance company is not a court, and if HMRC want the settlement included as takings then it must be wrong to tax it, especially as the insurer will not be remitting the deductions to HMRC.
If paid gross the profit will qualify for pension contributions, if paid net it won't. Equitable settlement?

I'm not trying to avoid tax, I would welcome a gross payment and meet the liability as it arose.

Answer 1

As I'm sure that you are aware, British Transport Commission v Gourley involved an engineer being awarded damages against BTC following injuries sustained in a railway accident. The award covered an amount for loss of actual and prospective earnings. The HoL decided that the method of calculating the award by reference to loss of earnings was irrelevant and it was not a trading receipt.

This only applies to awards for personal injuries and the receipt should be calculated on the net amount that would have been due. They can notionally deduct the tax and NICs but not actually hand them over to HMRC, which is what I think they are inferring.

I suspect that the other side are talking about the 'Gourley Principle' that is derived from this case, that a person must not be placed in a better or worse position than if the contract had actually been carried out.

If your client is an sole trader, then the payment should be made gross and if it is for loss of earnings rather than compensation for personal injury, they should bring it in as a trading receipt, unless you feel that it is a capital receipt along the lines of Van Den Burghs v Clark (i.e entire frame work of the trade/business has been affected). I can see where you are coming from with BIM40105, but can you provide a little more detail about the circumstances that led to the compensation being paid? That might help me direct you to the right case law or statue.

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In reply to the addtional information - in loss of profits circumstances with no specific reference to personal injury sole trader should be paid gross with takings included in earnings. HMRC would still seek to tax and NIC the amount even if it had notionally been paid net of tax and NIC. Stick to your guns in the interets of your client.

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Answer 2

Personally, I think the award should be made at a figure equal to the earnings less tax and national insurance.

I'm not going to quote any cases and then have to query small differences between the claimants' circumstances. Let's just use common sense.

Your question implies this is the subject of an insurance claim. The aim of insurance payouts is to return you to the position you would have been in had the claim not been necessary. If you had actually earned the money then you would have paid tax and national insurance so would have only benefited by the net amount.

But you have not earned the money (hence the claim). Any money paid to you cannot be construed as earnings. We usually use the word compensation or damages but no matter what it is called it does not fall into any of the designated taxable sources of income. So why should the government be entitled to a share?

By receiving a net amount you are restored to the position you would have been in if you had earned the money. The government is not in the same position but they are not covered by the insurance nor a party to the claim.

Answer 3

The Gourley principle applies regardless of whether the other side is insured. If the loss of earnings is due to personal injury, the claim will be tax free. To compensate you for your actual loss of net earnings, the claim will be set equal to the net earnings lost. This is supported by BIM 40105. If they were to pay you a gross amount, you would be in profit, (which neither the courts nor the insurers would agree to!)