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E4.831 The tax element in damages—overview

Paragraph E4.832 describes the implications of the decision in Gourley v British Transport Commission¹ so far as tax on employment income is concerned. That decision related to damages for the loss of income of a partner who was injured in a railway accident; it does not affect the direct assessment to tax of the compensation, but is concerned with the adjustment of the amount of the compensation by reference to the tax which would have been charged on the lost income². In particular, it established the principle that a person must not be placed in a better or worse position than if the contract had actually been carried out. Where the amount of the compensation is reduced to take account of tax which would have been payable on the lost income, such reduction is not a payment of tax and there is no question of relief or repayment in respect of the reduction.

The principle established by that case is also relevant to property