23rd Jan 2020

How to tax compensation for loss of an agency

Manufacturer's agent had his agency cancelled and has been paid compensation. How is this taxed?

A manufacturer's agent had his contract terminated by the manufacturer whom he took to court for compensation under The Commercial Agents (Council Directive)Regulations 1993 (SI 1993/3053). He was awarded a significant sum for compensation and I can't get a definitive answer on how it should be taxed. The basis of the compensation calculation was the value of the agency as a business, using EBITDA and multiples for several years. This makes me lean towards treating the sums as a capital receipt subject to CGT and ER but the solicitor is arguing that it is like damages and therefore not taxable and a tax helpline I use thought it should be taxed as income (I don't agree with that because the payment is compensation and not indemnity)

Does anyone have any experience of how to tax such receipts?

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By chicken farmer

23rd Jan 2020 11:33

There is case law covering this type of situation - start with Murray v Goodness. There are others which I can't recall at the moment.

EDIT: Should, of course be Goodhews - Bloody predictive texting strikes again!

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By Montrose

23rd Jan 2020 10:42

The question is whether the agency was the principal business of the agent, so that its loss constituted the loss of the underlying structure of the agent's business. If the answer to that is "yes" then the receipt of compensation is not a trading receipt, but falls under the CGT regime.
On the other hand, if the lost agency was only one of a number of agencies, then the compensation is taxed as a trading receipt of the business

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Replying to Montrose:

By Mallock

23rd Jan 2020 10:55

That was my thought too. It is a husband/wife partnership and they have about 5 agencies all operating in the same type of product. However the agency lost made up over 65% of their income and its loss forced them to close their premises and operate the remaining diminished agencies from their house. My feeling was that the loss was sufficiently large to justify the disposal of a substantial/significant part of the business.

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