Suppose a client is offered compensation either for his consent to the cancellation of valuable rights, or to settle a claim for personal injury or unfair discrimination. To deliver the best after tax outcome tax practitioners need to be aware of the possible pitfalls. This paper considers a number of practical case studies exploring:
- how damages, costs and pre and post judgement interest are taxed
- when they are deductible on ordinary principles or under the new black hole expenditure provisions
- when they are consideration for taxable supplies or give rise to an entitlement to an input tax credit
- indemnities, damages for breach of warranty, reimbursements and liquidated damages clauses in contracts
- difficulties arising when taxation of damages becomes an issue in the conduct of litigation.