Loss of Profits Claims
Expert forensic accounting insight from Jack Ross Chartered Accountants
Quantifying a loss of profit claim is rarely straightforward. The instructing solicitor needs a forensic accountant who can build a credible financial model, withstand cross-examination on methodology, and produce an expert witness report that meets CPR Part 35 standards. We've worked on these claims across breach of contract, professional liability, personal injury and business interruption disputes since 1948, and the same question sits at the centre of every one: what would this business have earned but for the wrongful act?
What Is a Loss of Profits Claim?
A loss of profits claim seeks to recover the financial loss a business has suffered because of another party's wrongful conduct. The cause of action might be contractual, tortious, or statutory. The core principle is restitutio in integrum: putting the claimant back in the position they would have been in had the wrong not occurred.
This is distinct from a loss of earnings claim, which typically relates to an individual's lost income following injury or wrongful dismissal. Loss of profit claims focus on business profitability, though there's overlap where a sole trader or partnership is involved. Both require the forensic accounting expert to construct a counterfactual - a projection of what would have happened in the absence of the defendant's actions.
The legal basis determines the measure of loss. In contract, the starting point is Hadley v Baxendale [1854]: losses arising naturally from the breach, or those reasonably in the contemplation of both parties when they entered the agreement. In tort, the test is wider, and the wrongdoer is liable for all foreseeable consequences, subject to remoteness principles.
How Loss of Profits Is Calculated
The but-for test is the foundation. You're asking: what would profits have been but for the wrongful act? And then comparing that counterfactual against actual performance. The difference is the quantified loss.
Counterfactual modelling typically draws on three to five years of pre-breach trading history. The forensic accountant analyses revenue trends, gross margins, overhead ratios, and seasonal patterns to build a defensible projection. Where the business was growing, the projection should reflect that trajectory. Where it was declining, the model must account for the pre-existing trend honestly - anything else will be torn apart in cross-examination.
Industry benchmarks play a supporting role. If projected growth significantly exceeds the sector average, the expert must explain why. External data from sources such as the ONS, Companies House filings for comparable businesses, and trade body surveys all help corroborate or challenge the assumptions.
The calculation follows a logical sequence:
- Establish the but-for revenue (what the business would have earned)
- Apply the appropriate margin to derive but-for profit
- Deduct actual profit earned during the loss period
- Adjust for costs saved, benefits received and mitigation efforts
- Apply a discount rate where the loss extends into the future
A common mistake - and one that undermines credibility at trial - is claiming gross revenue as the loss rather than gross profit. A business that loses £2 million in turnover has not lost £2 million. It has lost the profit margin on that turnover, less variable costs no longer incurred.
Types of Claims
Breach of contract. The most common context. A supplier fails to deliver, a distributor wrongfully terminates an agreement, a contractor abandons a project. The quantification focuses on profits that would have been earned had the contract been performed. Where it specified a fixed term, the loss period is usually clear. Open-ended contracts require careful analysis of the commercial relationship and industry norms.
Professional negligence. Where a professional falls below the expected standard and that failure causes harm, the claimant can recover consequential losses. Since Manchester Building Society v Grant Thornton [2021] UKSC 20, the scope of duty analysis has become central. The defendant is only liable for losses falling within the scope of their duty, not for everything that would not have occurred but for the error. The expert's quantification must be framed accordingly.
Personal injury. Where injury prevents a business owner from running their operation, lost profits form part of the damages alongside general damages. The key challenge is separating the individual's earnings capacity from the business's inherent profitability - a business with employees may continue generating income even while the owner is incapacitated.
Business interruption. Fire, flood, pandemic, supply chain failure - any event forcing a business to cease operations can give rise to a claim, whether against a tortfeasor or under a business interruption insurance policy. Insurance-based claims add complexity because the policy wording defines "gross profit" differently from standard terminology, and the forensic analysis must work from the policy definitions.
The Forensic Accountant's Role
The forensic expert brings financial modelling expertise, independence, and experience of giving evidence on quantum to business disputes that turn on the numbers.
At the pre-action stage, the expert reviews available financial data, identifies gaps in disclosure, and provides a preliminary valuation of quantum. This helps the solicitor assess the strengths and weaknesses of the position before significant costs are incurred. A well-supported figure in the letter of claim carries more weight than a round number.
During proceedings, the expert prepares a formal report complying with CPR Part 35. This sets out methodology, assumptions, data sources and calculations in sufficient detail for the opposing side to test them. Expert discussions under CPR Part 35.12 often narrow the issues considerably, and the joint statement that follows focuses the court on genuine disputes - a core part of the dispute resolution process.
What Documents Are Needed
Disclosure requirements depend on complexity, but as a starting point the expert will typically need:
- Statutory accounts for three to five years pre-breach and post-breach
- Management accounts (monthly or quarterly) for the same periods
- Tax returns and corporation tax computations
- VAT returns (useful for verifying revenue figures)
- Bank statements covering the loss period
- Budgets, forecasts or business plans prepared before the breach
- The contract or agreement at the centre of the dispute
Early and complete disclosure matters. Gaps in the records weaken the counterfactual and give the defendant's expert ammunition. Where records are poor, the forensic accounting analysis may need to reconstruct the financial position from bank statements, HMRC records and third-party data.
Common Issues in Loss Quantification
Mitigation. The claimant has a duty to take reasonable steps to reduce the loss. The expert must assess what was done and whether it was reasonable. The standard is reasonableness, not perfection - no one has to take every conceivable step, only those a reasonable person would have taken.
Contributory negligence. Where both sides contributed to the outcome, the court may reduce damages under the Law Reform (Contributory Negligence) Act 1945. The expert typically presents the full figure and alternative calculations at reduced percentages (75%, 50%, 25%), letting the court apply whatever reduction it considers just.
Taxation of damages. Damages for lost trading profits are generally taxable as trading income under ITTOIA 2005 or CTA 2009. Where the award simply replaces profits that would have been taxed, no gross-up is needed. But where it creates a different tax outcome - pushing income into a higher bracket in a single year, for instance - the expert should quantify the additional cost.
Wasted expenditure. Where lost profits can't be reliably calculated, the injured party may instead recover expenditure wasted in reliance on the contract. Anglia Television v Reed [1972] established this principle. It's particularly relevant for start-ups with no trading history, where projecting future profits would be speculative.
Key Takeaways
- The but-for test is the foundation - build the counterfactual, compare it against actual performance, and quantify the difference
- Loss of profit claims arise across contractual, tortious and insurance disputes
- Manchester Building Society v Grant Thornton [2021] UKSC 20 limits recovery to losses within the scope of duty
- The expert report must comply with CPR Part 35 and present methodology transparently enough to withstand cross-examination
- Mitigation, contributory fault and taxation are the three issues most commonly raised by the opposing side
To discuss an instruction, contact Jack Ross or call 0161 832 4451. We provide preliminary quantum assessments to help solicitors evaluate the financial viability of a claim before committing to full litigation support.
Frequently Asked Questions
We apply the but-for test: modelling what the business would have earned in the absence of the wrongful act, then comparing that counterfactual against actual results. The projection uses three to five years of pre-breach trading data, industry benchmarks and, where available, management forecasts. The net loss is adjusted for mitigation, saved costs and any benefits received.
They can be. Under Hadley v Baxendale [1854], lost profits fall under the second limb (consequential loss) where they were reasonably contemplated by both parties at the time of contracting. But they can also be direct damages under the first limb where they arise naturally from the breach. The classification matters particularly where the contract contains a consequential loss exclusion clause.
The process involves reviewing historical financial records and identifying pre-breach trends, constructing a counterfactual model, comparing projected against actual results, adjusting for mitigation and saved costs, and preparing a compliant expert report documenting every assumption and data source.
It depends on the complexity and the quality of available records. A straightforward claim with good records might take four to six weeks from receipt of disclosure. A multi-entity group with poor records and a contested loss period can take three months or longer.
Yes, but the evidential burden is higher. The counterfactual must be built from business plans, market research, comparable businesses, and industry data. The court will apply a higher discount for uncertainty. Where projections are too speculative, the alternative is a wasted expenditure claim under Anglia Television v Reed [1972].