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the professional negligence blog

A collaboration between Rebmark Legal Solutions and 1 Chancery Lane

Tax and damages

More on Capita Alternative Fund Services v Drivers Jonas [2012] EWCA Civ 1417 (see earlier posting), which concerned the valuation of a factory outlet shopping centre (“FOC”) at Chatham Dockyard. The Claimants were a variety of investment vehicles and the FOC was in an Enterprise Zone. Hence the individual investors obtained substantial tax credits. In calculating £18.05m damages, the judge rejected the Defendant’s argument that the Claimants’ damages should be reduced by the amount of their tax credits. The Defendant appealed on this (and other points) arguing that the failure to take tax credits into account offended the compensatory principle.

The Court of Appeal, which was unanimous on this point, took as its starting point the “general rule” (Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39) that damages had to be compensatory. It accepted that it was necessary to look at the market value of the whole transaction to assess the loss suffered (Ford v White [1964] 1 WLR 885, 888). It was unreal to leave tax considerations out of account because tax considerations were part and parcel of the scheme. Hence the principle of BTC v Gourley [1956] AC 185 was applicable and damages had to be adjusted accordingly.

The Court of Appeal’s solution was to deduct tax relief from both the Defendant’s valuation figure (£62.85m) and the correct market value (£44.8m). Once this was done, the Claimants were entitled to damages of £11.86m.

As the Court of Appeal recognised, it is not appropriate to take tax into account in every claim for damages. The matter is, at it recognised, “one of fact and degree”. Nevertheless where the Gourley principle does apply, this may have a significant impact on damages.

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