Mark McLaughlin looks at an instance where compensation receipts may be taxable as income, not capital.
A business could suffer a loss of income or profits through no fault of its own. This may result in entitlement to compensation or damages.
Income or capital?
The receipt of business compensation or damages may be treated as income or capital, depending on the circumstances. This distinction may be important for various reasons. For example, a capital receipt may be eligible for relief from capital gains tax (e.g., business asset disposal relief).
Unfortunately, the tax legislation offers little assistance in establishing whether business compensation or damages receipts are income or capital. This has resulted in numerous court cases in that area.
For a receipt to be treated as trading income, it must be a profit