Tax and Taxability
At common law awards of damages were not reduced or adjusted on the basis of the taxation effect. The issue of taxation arises in relation to a loss for which damages are awarded, which would otherwise be subject to tax, but where the damages awarded are not themselves subject to tax.
n a famous case in 1956 the House of Lords held, in relation to a personal injuries claim. that past and future loss of earnings must take account of the taxation of income. In this case, the damages themselves were not subject to tax so that the failure to take account of tax would overcompensate.
It is necessary to consider the amount of loss which would have been otherwise taxed and the extent to which the damages are not taxed. Whether or not the damages are taxable depends on the application of tax law. This will involve consideration of the type of loss concerned.
Capital gains tax may be relevant in relation to loss arising from the destruction of an asset. Generally, damages which represent the proceeds of the destruction of an asset are subject to CGT. Rollover relief may be available.
Capital gains tax legislation exempts sums arising from personal injuries and certain other sums from the charge to capital gains tax.
Many types of damages will not be taxable at all. Damages for personal injuries received as a lump sum (in the usual way) not generally taxable. Income earned on the capital/lump sum is taxable, in the same manner as interest generally.
Sums for non-pecuniary loss are not generally subject to taxation. Loss of amenity, bodily injury, pain and suffering are not subject to taxation. In contrast, earnings will generally be subject to taxation.
Damages may be subject to tax, but to less tax, than would have applied to the income or monetary loss concerned.
Effect of Tax
Courts have been reluctant to go into a detailed analysis of the extent to which one factor offsets the other. The English courts have taken the view that if the damages are taxable, the court need not inquire further. Other courts have criticised this view as arbitrary and required that a more detailed analysis be undertaken.
In some cases, anomalies may arise. Awards on termination of employment used to enjoy substantial exemptions from taxation in recognition of the particular difficulties an individual may encounter on termination of employment. The extent of income exempted has been limited significantly
Damages may be subject to tax than on the underlying loss. On this basis, damages should be increased to take account of this factor. This may occur where the lump sum is taxable because it is received all at once, whereas the income might have been spread over a greater period at lower rates and with greater offsetting allowances.
The modern view is that full account is taken of the taxation differential. The calculation may be complicated. The principle is applicable across the board from personal injuries, claims for defamation, unfair dismissal, breach of contract trespass, damage to goods etc. In each case, it is necessary to consider the matter from the perspective of the above principle.
The onus is on the defendant to show that on the facts alleged, that damages would be taxable. The onus is on the claimant to prove the particulars of his loss in terms of the incidence of taxation.
It appears that mathematical exactness is not required. The parties’ tax experts should be able to agree or ascertain the figures. Evidence may be offered if the advisors do not agree. It appears that the impact of taxation is considered at the current prevailing tax rates. Past rates are relevant in relation to pre-trial loss.
The Irish Supreme Court has confirmed the principle that the effect of tax should be taken into account, in awards of damages, where the failure to make the appropriate adjustment in assessing the damages, would result in a windfall for the claimant. The Irish courts have also held that where damages for loss of profits are themselves taxable, no deduction should be made.
The principle applies to claims for loss of profit. Profits are generally taxable, whereas the receipt of a lump sum may be subject to capital gains tax or may be exempt. Evidence should be given as to the actual loss incurred.
Interest at Law and in Equity
The law in relation to interest has developed in a fragmentary manner. Historically, the common law did not favour interest. Ultimately at the start of the 18th century, interest could be awarded at common law in limited cases The courts were granted power to award interest on damages in the nineteenth century; 1833 (England and Wales).
Compound interest may, in effect, be available on special damages. It may be a head or type of special damage or loss, which is specifically foreseeable in the circumstances. The principle applies primarily in the context of breach of contract. In some kinds of civil wrongs, an economic loss which includes compound interest may be foreseeable.
The courts of equity were always willing to grant compound interest. They are particularly willing to ensure that a person does not make a profit from his wrongdoing. Where an account is allowed and ordered, compound interest may be allowed within the account, in order to reflect the true position in the matter.
At common law, where a person had an entitlement to receive payment, funds or has lost a specific measurable sum at a particular time, he may have lost interest by reason of the breach and non-receipt, by reason of not having the use of the money earlier. Interest is generally recoverable on an unpaid price either by statute or under the discretionary power. Interest is may also be appropriate where there is a breach of warranty arising from defective goods.
Damages may be awarded for the period between the date when the claim/cause of action arose and the date of judgment. Interest should not generally run from prior to the date of the claim. In some circumstances, interest will run only from a later date. The actual loss may not arise until a future date, in which case interest should run from that later point in time.
Interest may be reduced or denied if there is an unjustifiable delay in bringing legal proceedings. Equally, the level of lump sum damages may be reduced on account of delay.
In principle, a person who claims for personal injuries and loss of earnings should be entitled to interest on the loss from the date it occurred both on the general and special damages incurred. However, interest is awarded only on monetary loss in respect of money which he would otherwise have been paid to the claimant. This has been criticised.
In practice, the courts do not generally make precise calculations in respect of each heading of loss, from the date on which the damage occurred to the date of judgment. Averaging and rules of thumb are applied, where convenient.
In the case of discretionary interest, no fixed rate is applicable. The court may have regard to the amount set by statute in respect of awards of damage. The modern approach to common law damages looks at the commercial rate of interest and return. In the 19th and early 20th century, a practice of granting 5% interest had developed. The latter part of the 20th century saw significant inflation, which requires a variation of this approach.
In England, the base rate plus 1%. is commonly applied. Exceptionally, a rate of 2% plus base rate is awarded. The base rate generally the interbank lending rate, prevailing at the relevant time. The approach generally, is to use the approximate rate which the claimant e company would have been charged if it had borrowed.
In cases with a foreign element, a foreign interest benchmark may be appropriate.
Assets – Land
Generally, the market value of an asset or property is measured at the time of the breach. The claimant is obliged to mitigate, which may require him to go into the market and purchase a replacement if possible.
The measure of damages will not be less than the normal measure where the market value has decreased before the time of judgment if the claimant can show that he would have sold the goods before the market fell.
If the market has increased, the increase in market value may be added as consequential loss up to the time that the actions should reasonably have been brought to judgment.
In the case of a purchaser of land, it appears that he need not, upon the seller’s default, buy other lands in replacement until such times as he has taken steps to enforce the contract, during such time when he could reasonably have taken steps or until such time as he receives damages, if inflation makes it too difficult to find repurchase.
Inflation presented particular problems for the courts particularly in the previous 1970s to early 1980s.
Where there has been a substantial fall in value between the time the claim/cause arose and that date of judgment, damages may be awarded at the market value of the goods at the time of judgment, provided the claimant does not unreasonably delay in bringing an action. In contrast, in the case of failure to deliver goods in breach of contract, the market value is generally measured at the time of the breach. This would not be affected by a subsequent increase in the market value, even if due to inflation. The claimant must seek a substitute upon the breach.
Where the loss is a monetary loss, the courts have taken different approaches in relation to fall in values. There are strong arguments for measuring the less on the basis of the value of money at the time of the breach. However, in some cases, the courts have taken account of inflation and based the assessment on the position at trial where appropriate, for example in the case of non-pecuniary losses and personal injury.
Assets – Goods
In the case of contracts for the sale of goods, the normal measure applies. The “innocent” party is obliged to try to find a buyer or seller of the goods as appropriate.
Where the purchaser has prepaid for the goods in advance of the breach, he is not required to seek a replacement, as he incurred the expenditure. Accordingly., he is entitled to claim damages in respect of any increase in value between the date of breach and the earliest time he should have brought the case of judgment.
A person may be compensated for the loss of value of goods by reason of failure to deliver goods or by or late delivery. The award for the value of the goods may substitutes for interest in this case so that no further award of interest is required.
Traditionally State granted judgment in their own currency. Both the Irish and English courts have reversed this historical rule to allow for a judgment in a foreign currency.
The basic rule is that loss is calculated at the date of breach, both in the cases of tort and breach of contract. In the 1970s, the House of Lords and later the Irish courts reversed the historic rule due to conditions of inflation.
The foreign currency judgment must be converted into domestic currency in order to enforce it. Commonly, this will be the date of judgment. The courts in England have favoured the date of payment as opposed to the date of breach or date of judgment.
Similar issues arise in relation to foreign judgments. The proper law of the contract is a matter of interpretation. It may determine the currency in which judgment is to be given. However, this is not necessarily so.
The money or count of money of payment need not necessarily be the proper law of the contract.
Interest by Statute I
Statute generally allows for discretion in the award of interest. The discretion applies to whether interest should be awarded, the rate, and for what period. The power to award interest should be used appropriately to meet the full loss and damage sustained, where required.
Interest is awarded on judgments for damages at a statutory rate. This rate is varied from time to time. It is simple interest and it applies to the amount for which judgment is given.
Statutory interest applies in relation to failure to pay money or special damages which are specifically foreseeable. Outside of this, there is a general discretionary power to award interest.
The Debtors Ireland Act 1840 allows a court to award interest on judgment debts. This is the equivalent of the English 1833 legislation. Every judgment debt due upon any judgment not confessed or recovered for any penal sum for securing principal and interest shall carry interest at the rate specified from time to time by order from the time of entering up the judgment, or from the time of the commencement of this Act in cases of judgments then entered up and not carrying interest until the same shall be satisfied; and such interest may be levied under a writ of execution on such judgment.
The Minister for Justice may if he is satisfied that the rate of interest per annum for the time being standing specified ought having regard to the level of rates of interest generally in the State, to be varied, make an order varying the rate of interest so standing specified.
Power to order interest on awards
Where in any proceedings a court orders the payment by any person of a sum of money (which expression includes in this section damages), the judge concerned may, if he thinks fit, also order the payment by the person of interest at the rate per annum standing specified for the time being , on the whole or any part of the sum in respect of the whole or any part of the period between the date when the cause of action accrued and the date of the judgment.
This does not
- authorise the giving of interest on interest, or
- apply in relation to any debt upon which interest is payable as of right whether by virtue of any agreement or otherwise, or
- affect any damages recoverable for the dishonour of a bill of exchange, or
- shall authorise the giving of interest on damages for personal injuries, or in respect of a person’s death, in so far as the damages are in respect of—any loss occurring after the date of the judgment for the damages, or i) any loss (not being pecuniary loss) occurring between the date when the cause of action to which the damages relate accrued and the date of the said judgment.