Remedies and tax

Where a dispute is brought to an end by the payment of damages or compensation, whether under a court order or an out-of-court settlement, a number of tax issues may arise. These include:

1. •

   whether the recipient (the claimant) will have to pay income tax, corporation tax or capital gains tax on the amount received

2. •

   whether the payment is subject to VAT, and, if so, whether the person making the payment (the defendant) will have to pay VAT in addition to the main amount

3. •

   whether the defendant will be able to claim tax relief for the payment, and

4. •

   whether tax considerations (including any tax on the damages or compensation payment itself, and any tax that would have been payable but for the defendant's wrongdoing) will affect the calculation of damages

The Practice Notes in this subtopic are about these issues, ie tax considerations relating to damages or compensation payments, and are introduced in more detail below. A separate subtopic considers the remedies available to a taxpayer who has paid too much tax. This is normally about whether there is a right of recovery against