The effect of tax on the quantum of damages
The effect of tax on the quantum of damages

The following Tax guidance note provides comprehensive and up to date legal information covering:

  • The effect of tax on the quantum of damages
  • The Gourley principle
  • Extending Gourley—where the damages are taxable
  • Calculating the tax on compensated losses
  • Tax treatment of damages
  • Tax benefits
  • Interest

This Practice Note considers the effect of tax considerations when a court decides how much to award a claimant as damages for a financial loss.

The court's aim will be to award an amount of damages that will place the claimant in the same position as if the wrong or injury (for instance negligence, misrepresentation or breach of contract) had not taken place. This means that it may be relevant to consider:

  1. any tax that will be payable on the damages award (see Practice Note: Direct tax treatment of damages and compensation payments), and/or

  2. the tax that would have been payable if the wrong or injury had not taken place—for instance, if the damages are to compensate the claimant for a loss of trading profits, whether the claimant would have been taxable on those profits

If this is a contractual dispute, then before considering the principles discussed in this Practice Note, you should find out whether there is an express contractual term that will be relevant to the claim in question. In particular there may be a tax gross-up clause providing that payments under warranties or indemnities (for instance) will be increased if the recipient suffers tax on the payment. An express agreement of this nature will generally be respected, provided it is clear how the clause operates in the factual circumstances that