Introduction
The House of Lords ruling in IRC v Biggar [1982] STC 677 sets out methods for identifying how lump-sum payments received in business should be treated. The key question is whether such payments are capital (often not taxed as income) or revenue (taxed as trading income). The judgment outlines factors to resolve this, including how the transaction was arranged, the reason for the payment, and its relationship to the taxpayer’s regular business. This ruling clarifies how lump sums are taxed and continues to apply in modern tax law.
The Facts of IRC v Biggar
The taxpayer, Mr. Biggar, sold potatoes. He had a yearly renewable agreement giving him exclusive rights to buy potatoes from specific farms. When the farms were sold, the new owner paid Mr. Biggar a lump sum to cancel the agreement. The Inland Revenue claimed this payment was trading income, while Mr. Biggar argued it was a capital receipt.
The House of Lords' Decision
The House of Lords ruled the payment was trading income and taxable. They concluded the payment replaced future profits Mr. Biggar would have made under the continuing agreement. The agreement was not a capital asset but a central part of his business, enabling him to purchase potatoes for resale. The payment to end it was tied to his trade and treated as trading income.
Distinguishing Capital and Revenue Receipts
IRC v Biggar highlights the challenge of separating capital and revenue receipts. Capital receipts come from selling long-term business assets (e.g., property). Revenue receipts arise from routine business activities. The case states payments must be judged based on the specific business situation and transaction facts, focusing on practical outcomes rather than formal terms.
The Lasting Importance of IRC v Biggar
This case remains a key reference in UK tax law for handling lump-sum payments. It confirmed that compensation for lost future profits, even as a lump sum, is typically trading income. The Lords’ focus on the payment’s reason and link to business activities gives a structure for assessing similar disputes. Later rulings have expanded on these ideas, refining the capital-revenue split in other scenarios.
Applying the IRC v Biggar Rules
The rules from IRC v Biggar apply to many cases involving lump sums. For example, compensation for ending a business contract (as here) would usually be trading income. Selling a business property, however, would generally be a capital receipt. Each case turns on details: the asset or right given up, the payment’s conditions, and the taxpayer’s business. The judgment demands a detailed, fact-based analysis to classify payments correctly.
Conclusion
The IRC v Biggar ruling is a leading case on taxing lump-sum payments. The House of Lords clarified how to separate capital and revenue receipts by studying the payment’s reason and connection to business. These methods remain relevant today, aiding resolution of similar issues. The decision stresses reviewing each transaction’s specific facts to determine tax treatment, favoring practical results over formal wording. This approach ensures consistent handling of lump-sum receipts.
