In Zim Properties v Proctor [1985], it was held that a cause of action is an asset which is taxable if it is turned into cash (by a settlement or judgment/award). Following that case, the Inland Revenue introduced an Extra Statutory Concession D33. This provided that: (a) where a right of action arises because a form of property has been damaged or destroyed, any gain on the disposal of the right of action is calculated as if the compensation derived from the underlying asset (not the cause of action). As a result, only an amount over and above the original value of the property will be taxable (paragraph 9); and (b) in all other cases, where the right of action was in connection with a matter which did not involve a form of property which was an asset for Corporation Tax/CGT purposes, (such as a claim in respect of negligent professional advice), any gain was exempted from Corporation Tax/CGT (paragraph 11).

In January 2014, the Inland Revenue revised paragraph 11. Any damages over GBP 500,000 (whether obtained by settlement, judgment or award) are now likely to be taxable and must be notified to the HMRC (which will exercise its discretion on a case-by-case basis). Some causes of action remain unaffected (e.g. personal injury claims). The Inland Revenue has recently consulted on raising this cap to GBP 1 million (with any amount over that cap automatically becoming chargeable to Corporation Tax/CGT, and the removal of HMRC’s discretion as to the applicability of the charge).

As a result, if you are a claimant, you should bear in mind that depending on the amount of a settlement, judgment or award, the HMRC may have to be notified, and you should also ensure that any compensation claimed takes account of the potential tax consequences of a settlement/ judgment/award (ie by seeking the main figure plus the CGT/Corporation tax that may have to be paid on it).