Compensation payment - how to categorise it? Limited company

pjs493

I recently received a monetary sum as good will gesture from my insurance company after some appalling customer service. 

How should I categorise this incoming payment? 

Hoenir

Other income. 

pjs493

Hoenir said:

Other income. 

Thanks. I wasn’t sure if I needed to be more specific. I was tempted to categorise it as a refund, but the compensation is more than my annual policy. 

uknick

Are you a sole trader or Ltd? It may make a difference to the taxation of the amount.

Assuming you're a sole trader, I'm not so sure about "other income" as this will be taxable.  This is wrong if the payment is in no way related to your trading activities. 

For an individual it is probably not taxable, and if it is, it comes under CGT for which you get your annual CGT allowance.  I assume it's not considered income tax by HMRC as the amount isn't covered by any of the tax schedules.

Schedular system of taxation - Wikipedia

For example, this is the extract from the HMRC forum;

Is 'Inconvenience Payment' taxable? - Community Forum - GOV.UK (hmrc.gov.uk)


A simple question with a not so simple answer, as with all tax.

pjs493

uknick said:

Are you a sole trader or Ltd? It may make a difference to the taxation of the amount.

Assuming you're a sole trader, I'm not so sure about "other income" as this will be taxable.  This is wrong if the payment is in no way related to your trading activities. 

For an individual it is probably not taxable, and if it is, it comes under CGT for which you get your annual CGT allowance.  I assume it's not considered income tax by HMRC as the amount isn't covered by any of the tax schedules.

Schedular system of taxation - Wikipedia

For example, this is the extract from the HMRC forum;

Is 'Inconvenience Payment' taxable? - Community Forum - GOV.UK (hmrc.gov.uk)


A simple question with a not so simple answer, as with all tax.

It's a limited company.

uknick

pjs493 said:

uknick said:

Are you a sole trader or Ltd? It may make a difference to the taxation of the amount.

Assuming you're a sole trader, I'm not so sure about "other income" as this will be taxable.  This is wrong if the payment is in no way related to your trading activities. 

For an individual it is probably not taxable, and if it is, it comes under CGT for which you get your annual CGT allowance.  I assume it's not considered income tax by HMRC as the amount isn't covered by any of the tax schedules.

Schedular system of taxation - Wikipedia

For example, this is the extract from the HMRC forum;

Is 'Inconvenience Payment' taxable? - Community Forum - GOV.UK (hmrc.gov.uk)


A simple question with a not so simple answer, as with all tax.

It's a limited company.

Doh!!  I missed that you'd put that in the title.  Sorry about that.  In that case look at this;

BIM40105 - Specific receipts: compensation and damages: is it a trade receipt? - HMRC internal manual - GOV.UK (www.gov.uk)

which seems to indicate a payment received by a company for hurt to feelings of the proprietor and not part of your normal trading is not taxable.  Can one say the compensation was paid as they upset you by their incompetence?

If you post it as other income, you would take it back out again when you do your tax return as part of the "Other deductions from trade profits" line.

Have you spoken to your accountant about this?  If so, what are their views?

 

pjs493

uknick said:

pjs493 said:

uknick said:

Are you a sole trader or Ltd? It may make a difference to the taxation of the amount.

Assuming you're a sole trader, I'm not so sure about "other income" as this will be taxable.  This is wrong if the payment is in no way related to your trading activities. 

For an individual it is probably not taxable, and if it is, it comes under CGT for which you get your annual CGT allowance.  I assume it's not considered income tax by HMRC as the amount isn't covered by any of the tax schedules.

Schedular system of taxation - Wikipedia

For example, this is the extract from the HMRC forum;

Is 'Inconvenience Payment' taxable? - Community Forum - GOV.UK (hmrc.gov.uk)


A simple question with a not so simple answer, as with all tax.

It's a limited company.

Doh!!  I missed that you'd put that in the title.  Sorry about that.  In that case look at this;

BIM40105 - Specific receipts: compensation and damages: is it a trade receipt? - HMRC internal manual - GOV.UK (www.gov.uk)

which seems to indicate a payment received by a company for hurt to feelings of the proprietor and not part of your normal trading is not taxable.  Can one say the compensation was paid as they upset you by their incompetence?

If you post it as other income, you would take it back out again when you do your tax return as part of the "Other deductions from trade profits" line.

Have you spoken to your accountant about this?  If so, what are their views?

 

I do my own accounts as my business transactions are fairly simple and straightforward. If things become more complicated as the business grows I'll likely engage an accountant then.

I basically got treated inappropriately by a call centre agent when I called to renew my business insurance. It stemmed from the call centre agent claiming that the insurance was invalid because I couldn't have my late husband speak to the agent. My husband and I set up the company together with both of us as directors. He died unexpectedly last year and apparently was the one who finalised last year's insurance even though I usually deal with all the paperwork. I vaguely recall him taking a call-back on my phone while I was busy doing something and he completed the transaction last year. The insurance is in the name of the business and not either of us as individuals. None of the documentation I have has either of our names on it, but evidently the insurance company took his name when he completed the transaction, even though the business debit card was used.

I tried to explain to the agent that he couldn't speak to my husband because he recently died, but instead of acting compassionately, the agent started to be abusive and refused to accept that I was a director of the company and had been since it was founded. I ended the call by saying I wanted to raise a complaint and I'd take my business elsewhere. I was deeply upset and distressed and I think I was crying when the call ended.

Later that afternoon a supervisor called me with profuse apologies after he had listened to a recording of the conversation, implied that the call handler would be fired, and offered me a substantial monetary goodwill gesture for what I had experienced. He asked for bank details to make the payment and questioned whether I was sure that I wanted it paid into the business account rather than a personal one. At the time it felt wrong to take the money into my personal account because it was something to do with the business, but now I'm wondering if I should have given my personal bank details because ultimately the issue was caused because of personal circumstances, not business ones.

uknick

The refund should have gone to the Ltd as that's who the customer and the contract is with.  Don't forget the Ltd is a completely separate legal entity to you.

From what you've said, I'd put it in other income and then remove when you do your tax calculation.   Keep a note of the link I sent you and if HMRC do question it, use that to explain.  But, unless it's a significant amount of money, or material to your accounts, I doubt HMRC would questions it.

pjs493

uknick said:

The refund should have gone to the Ltd as that's who the customer and the contract is with.  Don't forget the Ltd is a completely separate legal entity to you.

From what you've said, I'd put it in other income and then remove when you do your tax calculation.   Keep a note of the link I sent you and if HMRC do question it, use that to explain.  But, unless it's a significant amount of money, or material to your accounts, I doubt HMRC would questions it.

Thanks. I made the point about the company being its own legal entity with both of us as directors while on the phone when the guy tried to argue that the insurance was in my husband’s name for *his* business. 

Thanks for your advice. I’ve made a note in my spreadsheet so when I cross check it with my accounting software, I’ll remember what it was for and deduct it accordingly. 

It’s not a significant amount in the grand scheme of the business, but it was substantial in my opinion given the situation. I’ve previously had poor customer service for a variety of things and been offered a token amount as a goodwill gesture but I was surprised that they seemed to go ‘top end’ over what happened. I think the supervisor recognised the sadness of the situation as well as what happened. It was certainly much more than to be considered a refund. 

martindow

I hesitate to step into this amongst experts, but doesn't the reason for being offered this compensation come in to it.

If the reason was that something purchased was sub-standard or mis-represented and the OP is accepting the payment for this, it is in effect a discount to the price originally paid and should be treated as such in the company's accounts.

On the other hand, if the OP has spent lots of time trying to sort things out and the insurance company is offering compensation to him personally for his wasted time or worry created, isn't this analogous to being sent a gift to him personally and independent of his company?

uknick

martindow said:

I hesitate to step into this amongst experts, but doesn't the reason for being offered this compensation come in to it.

If the reason was that something purchased was sub-standard or mis-represented and the OP is accepting the payment for this, it is in effect a discount to the price originally paid and should be treated as such in the company's accounts.

On the other hand, if the OP has spent lots of time trying to sort things out and the insurance company is offering compensation to him personally for his wasted time or worry created, isn't this analogous to being sent a gift to him personally and independent of his company?

I think as the Ltd bought the insurance therefore the Ltd takes the money.  I suppose if the insurance company had made the payment to the individual's bank account specifically stating it was due to the insurance company upsetting the individual you could ignore it for Ltd purposes.

But, at the end of the day my suggested treatment avoids any additional taxation at this point, and the owner of the company can take it out as dividends when it best suits them with regard to their personal taxation situation.

With regard to your gift scenario, why would a company gift an individual something if they have no business reason to, e.g. future sales?