'(1) In section 375A of the Taxes Act (exemption for interest included in judgment or interlocutor awarding damages for personal injuries) after subsection (1) there shall be inserted—
(1A) A payment in satisfaction of a cause of action, including a payment into court, shall not be regarded as income for any income tax purpose to the extent to which it is in respect of interest which would fall within subsection (1) above if included in a sum for which a judgment is given or if decree for payment' of it were included in an interlocutor.
§ (2) This section has effect in relation to any payment made on or after 6th April 1981.'—[Mr. Brittan.]
§ Brought up, and read the First time.
§ The Chief Secretary to the Treasury (Mr. Leon Brittan)
I beg to move, That the clause be read a Second time.
This new clause extends the exemption from income tax provided by section 375A of the Income and Corporation Taxes Act 1970 for interest on damages for personal injuries for which judgment is given to include 1002 the interest element included in the payment into court, but for which, in the event, judgment is never given. The interest element in an out-of-court settlement is made between the parties.
Up to now, when there was a court judgment and interest was payable, as a result, on damages for personal injuries, that interest was not subject to income tax. However, following a change in the rules of court in October 1980 it is expected that interest claimed in accordance with the rules of the Supreme Court, order 22, rule 1(8), will become payable in increasing numbers of personal injury accidents, which for one reason or another never come to formal judgment. They do not come to formal judgment, either because they are settled by a payment into court that is accepted or by an out-of-court settlement directly between the parties. In such cases the exemption from income tax provided by section 375A would not run. The cases of the kind that I have described are likely to increase in number as a result of the rule of the Supreme Court to which I referred, and I therefore commend the new clause, which extends the tax exemption to these two further classes of interest payment.
§ Mr. Robin F. Cook (Edinburgh, Central)
The Opposition see no ground on which to quarrel with the new clause. There are many grounds for changing a tax system and there is little reason for an arrangement whereby our tax system is altered as a by-product of a change in court rules. I commend the Minister for having introduced a change to stop up an unforeseen and undesirable consequence of a change in court rules. We take no exception to the new clause.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.