Settlement filled a hole in the business’s profits

The taxpayer provided international ground transportation services. An employee embezzled some £773 701 between 2004 and 2012. The accounts and corporation tax returns were amended to reflect this sum as business expenditure wholly and exclusively incurred for the purposes of the trade.

The taxpayer then took action against it former auditor and consultant accountant . This resulted in a settlement agreement under which the taxpayer received £566 000. It treated this as a capital receipt.

After an enquiry HMRC concluded the sum should be taxed as a trading receipt.

The taxpayer appealed.

The First-tier Tribunal said the settlement agreement had to be construed under ordinary principles rather than specifically from the point of a possible tax liability. In this case the agreement covered more than the pending litigation. The defenders wished to settle not only to avoid further litigation but also to avoid any suggestion of liability. The taxpayer...