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Are PI proceeds taxable?

Are PI proceeds taxable?

I overlooked the quarterly payments rules in a CT case and have a PI claim against me (& quite rightly so!). The late payment interest of £8K charged to my client is allowable for CT and thus the claim is reduced by 26%. When the claim is paid out  (roughly £5K) is that taxable?. If so, the agreed claim needs to be increased by the tax chargeable.

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09th Dec 2012 17:37

Yes - you can claim the costs of the claim etc against your profits, contrad with the income from the PI

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09th Dec 2012 18:20

I think . . .
I think the question is, in effect, will the client have to pay tax on the compensation he receives from the accountant / accountant's insurer.

I think the answer is yes. If the client obtained tax relief for the interest which he (initially) suffered then the reimbursement of that interest via the accountant's professional indemnity cover will also be taxable. So the client is then back to square one.
That means that the pay out should be equal to the gross interest paid by the client.
David

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10th Dec 2012 16:02

Thanks David,

Unfortunately that was the conclusion I reached.  I was hoping that I might restrict the damage a little.

But before I finally give up, is it the same animal? Is the refund from me/insurer interest or is it something else. My insurer seems to think that it is a settlement of a claim and as such is not taxable - but they would say that wouldn't they?!

 

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10th Dec 2012 16:19

It arises from the trade...

... and so is taxable. See BIM40105 2nd para.

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11th Dec 2012 09:40

Thanks George. Good point & also thanks for the xreference to the IR manual.

I've searched all sorts of bits of the manual without finding this section  & I knew it was there somewhere having referred to it in the past.

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12th Dec 2012 13:06

Not sure I agree there

the purpose of the compensation is for your client to be no worse off, or better off, than he would have been had you not made the error. This is different to compensation for crops or products which would have produced a profit which I think is the type of compensation referred to in Georges link.

Whenever I have prepared forensic calculations the compensation has been set to take into account all factors, so I would have included the interest/penalties, tax relief, as well as your credit for fees etc which I assume you cancelled, to get to that neutral position.

When this is awarded through the court in my experience the papers say after taxes and the compensation is not taxable.  I think I would agree with the insurers here

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By Alf
13th Dec 2012 10:13

Don't think it is trading

I don't have any practical experience with this but i would have thought that amounts that are tax-related are not "referable to trading operations" (BIM40105) and therefore are not trade receipts. To me it seems that tax is a consequence of trading, arther than the trade itself.

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14th Dec 2012 00:42

What about any costs of borrowing incurred before the PI payment

I would expect there to have been a delay between yorky's client paying the £8k to HMRC and his client recovering the £8k from yorky's PI insurer. If the client has to pay interest to borrow the £8k, or suffers loss of interest on his own £8k, then can that interest (namely the interest on the late payment interest) be set against the client's tax?

There would have been a similar situation if the client had sued yorky and won. The successful party usually recovers legal costs, though not all of them: 70% seems to be fairly typical. However, the losing party will also have to pay interest on those costs at the statutory rate of 8% for the period between the date of the judgment and the date of the payment of the costs. Presumably the interest on costs is taxable but can that be offset by the interest incurred by the client on legal fees up to the date of the payment of the costs?

Could the statutory interest on costs also be offset by the unrecovered legal costs (of about 30%)? If it could, then the unrecovered costs plus interest on legal fees would almost certainly exceed the statutory interest. Could the overall shortfall then be treated an allowable business expense.? If it can then I expect George will be able to cite the BIM number.

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14th Dec 2012 10:41

The clue is, it's a company

There can't be any question of the compensation being received in a personal capacity, for which there is a specific exemption.  The accounts treatment flows through to the CT treatment.

Whilst courts may make a damages award "after tax" or "free of tax", that simply puts the onus on the payer of the damages to determine whether or not the payment is taxable and pay the appropriate gross amount.

See also BIM40130.  Decide what you're going to do with it in the accounts (for an individual it might not go into the accounts) and then decide how it's going to be charged to CT from there.

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