IRC v Biggar [1982] STC 677

Facts

  • Mr. Biggar was a potato merchant with a yearly renewable agreement granting him exclusive rights to buy potatoes from certain farms.
  • Upon the sale of these farms, the new owner paid Mr. Biggar a lump sum to terminate this exclusive agreement.
  • The Inland Revenue contended that the payment constituted trading income and should be taxed as such.
  • Mr. Biggar maintained that the receipt was capital in nature and not liable to income tax.

Issues

  1. Whether a lump-sum payment received for the cancellation of a business agreement constitutes a capital receipt or trading income for tax purposes.
  2. What factors determine the classification of such lump-sum payments under UK tax law.

Decision

  • The House of Lords determined that the lump-sum payment received by Mr. Biggar was taxable trading income rather than a capital receipt.
  • The payment was deemed to replace the future profits that Mr. Biggar would have earned under the ongoing agreement.
  • The business agreement was viewed not as a capital asset, but as an essential part of Mr. Biggar’s trading operations enabling the acquisition of goods for resale.

Legal Principles

  • The distinction between capital and revenue receipts relies on the nature and context of the payment, focusing on substance over form.
  • Compensation for the loss of a source of future trading profits will generally be treated as taxable trading income.
  • Classification of a receipt depends on a detailed analysis of the transaction, considering the asset or right given up, the payment’s conditions, and its relation to ordinary business activities.
  • The decision prioritizes practical outcomes and the connection of the payment to the taxpayer’s regular trade.

Conclusion

The House of Lords in IRC v Biggar [1982] STC 677 clarified that lump-sum payments compensating for the loss of future trading profits are to be treated as taxable trading income, establishing a fact-based approach to distinguish between capital and revenue receipts in business taxation.

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