Direct tax treatment of damages and compensation payments


Published by a ³ÉÈËÓ°Òô Tax expert
Practice notes

Direct tax treatment of damages and compensation payments


Published by a ³ÉÈËÓ°Òô Tax expert

Practice notes
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Where a dispute is brought to an end by a payment of damages or compensation, whether under a court order or an out-of-court settlement agreement:

  1. •

    the person receiving the payment (the claimant) will want to know whether that amount is taxable, and

  2. •

    the person making the payment (the defendant) will want to know whether they can claim any tax relief

This Practice Note considers these two questions in turn, in relation to direct UK taxes. The parties will also need to know whether the payment attracts VAT, and this is considered in Practice Note: VAT treatment of damages and compensation payments.

Tax considerations may also be relevant to the calculation of the amount of the damages or compensation payment. This is considered in Practice Note: The effect of tax on the quantum of damages.

Tax reliefs apply to payments made by public authorities under certain specific compensation schemes, including the Windrush Compensation Scheme and the Post Office Horizon Compensation scheme. These are not covered in detail in this Practice Note.

The claimant—is

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Jurisdiction(s):
United Kingdom
Key definition:
Damages definition
What does Damages mean?

The monetary compensation awarded by law to a person for the legal wrong done to him.

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