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Tax on damages for loss of interest

Damages to compensate for loss of interest are taxable as interest.

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 [2017] UKFTT 705 (reported in Tax Journal 20 October 2017).

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...

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