There is a mistaken view that compensation and damages payments are generally exempt from Irish taxation, the matter can be complex to determine. While such awards can be tax exempt, this is only the case where same fall within the specific tax exemptions set out in the tax acts.
In order to determine the tax treatment, it is necessary at the outset to determine whether the relevant payment is capital or revenue in nature.
If the character of the payment is such that it compensates for a revenue loss, then the compensation is treated as an income receipt, which may be chargeable to Income Tax (or Corporation Tax in the case of a company).
Alternatively, if the payment compensates for a capital loss (for example loss or damage to a capital asset such as a building), it will be treated as a capital item and may be chargeable to CGT.
Income Tax Exemptions
Section 189 TCA 1997 – Income and gains arising to permanently incapacitated individuals from the investment of compensation payments in respect of personal injury claims. This income or gain must form the sole or main income of the individual.
Section 190 TCA 1997 – Payments made by the trustees of the Haemophilia HIV Trust to a beneficiary under the trust.
Section 191 TCA 1997 – Payments made to individuals who contracted Hepatitis C/HIV from certain blood or blood products.
Section 192A TCA 1997 – Payments made to an employee (or former employee) in connection with breaches or infringements of the employee’s employment rights through, for example, discrimination, harassment, victimisation, or the employer’s non-compliance with statutory requirements. The exemption is restricted to payments:
- arising from formal hearings before relevant authorities
- made following mediation processes provided for in law; and
- made in negotiated (out of court) settlements subject to certain conditions.
Section 201/ Schedule 3 TCA 1997 – Certain ex-gratia termination payments made by employers:
- in connection with the death of an employee, or
- on account of injury to or disability of the employee, or
- termination payments made by employers to departing employees.
Redundancy Payments Acts: Statutory redundancy payments made by an employer to an employee where an employment ceases by reason of redundancy.
Capital Gains Tax Exemptions
Section 536 TCA 1997 – Compensation or insurance sums received for damage to or destruction of assets or of sums for surrender of rights in relation to assets, provided the sum received is used in restoring or replacing the asset.
Section 613 TCA 1997 – Compensation or damages for any wrong or injury suffered by an individual in his or her person or profession. This would include compensation/damages received by the victim of a road accident or a libel/slander.
Many compensation payments are outside the scope of VAT. Where an award is compensatory and does not represent consideration for underlying supplies of goods or services. It will be outside the scope of VAT.
However, where compensation can be classified as “a toleration of a situation” within the meaning of Section 25 VATCA 2010, there is a supply for VAT purposes and the compensation is subject to VAT.
To determine the correct tax treatment, each settlement must be analysed on its own facts. First, classify the nature of the compensation payment (revenue or capital) and then apply the general principles established by legislation, case law and Revenue guidance.