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Hackett v HMRC

The taxpayers here ran a property rental business. The funding for the business included an interest rate hedging product and they obtained a tax deduction for the interest paid. Subsequently they obtained compensation because they successfully claimed that they had been mis-sold the product. They did not include the compensation as a trading receipt in their tax computations. HMRC disagreed and raised assessments to bring the compensation (and associated interest) into charge.

Their argument was essentially that the receipt represented the opportunity cost of losing the ability to invest in different hedging products, and as such it did not have a taxable source. The details of their argument ― see in particular paras 102 and 103 ― are extremely sophisticated and not easy to follow: a flavour of the approach they took can be seen in the following extract:

“… the Respondents’ argument for the tax assessment is logically invalid. Specifically, it is contended