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What is a premium?

28 June 2012
Issue: 4360 / Categories: Tax cases , Companies
Bluesparkle Ltd (TC1743)

Largeflag a wholly owned subsidiary of Bluesparkle contracted Totty Developments in May 2001 to build a private hospital in Darlington.

On 26 June Bluesparkle which was to run the hospital agreed to purchase the freehold from Largeflag with completion on the same day. The sale price was paid as one initial amount and then three instalments in 2005 2006 and 2007.

In 2005 the price was restructured to allow Bluesparkle to pay Largeflag in one instalment rather than three and included a premium £400 000 to reflect the early settlement.

An issue arose as to whether the premium was capital or revenue. Bluesparkle claimed a deduction for the amount in its profits but HMRC said the sum represented capital and the department disallowed the deduction.

The First-tier Tribunal said the premium was a capital payment which formed...

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