Alex Spencer considers the tax treatment of compensatory payments, the potential impact of tax on settlement discussions, and what advisers should be looking out for when clients either pay or receive compensation towards resolving their disputes.
Tax often risks being overlooked in attempts to reach a commercial settlement. However, tax will usually be relevant for one of two reasons. First, sums received in settlement are usually subject to tax in the hands of the recipient. Second, the tax treatment of the sums received as part of the settlement may influence the amount of the settlement itself. In this respect, parties paying compensation often need advice as much as those receiving it.
For both these reasons, advisers must be able to advise their clients how a compensatory payment will be taxed (whether in their client’s hands or in the hands of the party they are compensating) and whether it may be necessary to adjust to
