Summary: A First-tier Tribunal has opined that damages for loss of interest were themselves interest and taxable as income under the loan relationship rules. Although not binding, this decision contains useful guidance on the taxation of damages. However, the judge also comments that a payment guaranteeing interest is itself interest, which impacts on the withholding tax position. The case is Amalgamated Metal Corporation Plc v HMRC.
The case concerned a taxpayer who was awarded damages because its solicitors had settled a claim against HMRC for overpaid tax (here ACT) against the taxpayer’s authority. As a result of the actions of the solicitors the taxpayer received only simple interest from HMRC rather than compound interest. Consequently, the amount of damages was calculated by reference to the loss of interest from HMRC.
The judge analysed the taxation of the damages payment assuming it had jurisdiction.
The damages were interest
The First-tier Tribunal decided that the damages were not only calculated by reference to interest; they were interest in nature. Damages awarded to compensate for the loss of use of a sum of money for a period of time were interest. It did not matter that the debt to which the interest related was owed by someone (HMRC) other than the person who paid the interest (the solicitors). This was similar to the position of payments under guarantees that guarantee interest. These were also interest under the authority of Re Hawkins; they were replacement interest.
The damages were taxable under the loan relationship rules
Having decided that the damages payment was interest, the judge concluded that it would be taxable under the loan relationship rules. The money debt was the debt owing from HMRC to the taxpayer resulting from the overpaid tax. Here there was no ‘transaction for the lending of money’ to make the money debt a loan relationship. Instead, there was a relevant non-lending relationship because interest was payable on the debt from HMRC. As the ‘interest’ paid from the solicitors in the form of damages was payable ‘in respect of’ that relevant non-lending relationship, the damages were taxable under the rules for relevant non-lending relationships; there was a ‘relevant matter’ within s481 CTA 2009. It did not make any difference that the money debt from HMRC was cancelled as a result of the settlement with HMRC before the interest (in the form of damages) was paid.
Otherwise they were taxable as miscellaneous income
In case it was wrong on the loan relationship point the judge concluded (in the alternative) that the damages payment would otherwise be taxable as miscellaneous income under s979 CTA 2009. Following Attwooll, because the loss was income (the interest that would otherwise have been received from HMRC), the damages compensating for the loss were also income.
The decision is not binding
The judge concluded that she did not have jurisdiction to determine whether the damages payment was income or capital, but she considered the question in case she was wrong on the question of jurisdiction. The background is that the taxpayer was arguing that the damages award was capital and should attract concessionary treatment (and be exempt from tax) under D33. As it was a concession the judge did not have the authority to decide whether D33 should have been applied.
There is previous well known authority that damages can be taxable as interest (Riches v Westminster), but the new question here was whether it makes any difference if the person who pays the damages was not at any point the debtor who owed the principle sum. The judge here decided that it made no difference.
However, the case has also shone light on the long-running debate about whether a payment guaranteeing interest is itself interest. The judge’s views will not be a surprise for those who have been taking the approach that it is interest. The case is a reminder to those taxpayers guaranteeing interest to consider the question of withholding tax, including relevant exemptions.