McLaren Racing Ltd v HMRC… The Tax Position on CTA 2009 s54; Fines, Penalties, Expenses & Business Profits
Tax relief (or not) for fines
Legislation (CTA 2009 s54) states that a company can deduct expenses that are wholly and exclusively for the purpose of the trade against their business profits. It also goes on to state that no loss that is not connected with or arising out of the trade can be deducted from business profits.
But where do fines fall under this legislation? And does the nature of the fine or penalty have an effect on the tax treatment of the penalty?
Some may argue that any fine or penalty that is incurred within the ordinary course of the business should be an allowable expense from business profits, on the basis that the fine must be paid in order for the business to continue. This is particularly the case when the fine has arisen from a regulatory body where the business must be a member and abide by their rules in order to be allowed to trade.
HMRC specifically states that payments to regulatory bodies for the ongoing membership costs associated with the body are allowable expenses against the company’s income, this applies even when the company is in breach of the body’s regulations. However, penalties or fines that are imposed by a regulatory body for a breach of regulations or misconduct will not be an allowable expense on the basis that they are not wholly and exclusively for the trade and the loss is not connected with the trade.
The high profile court case of McLaren Racing Ltd v HMRC outlined the tax treatment of penalties.
In this case, McLaren was issued a penalty of £32m by the Fédération Internationale de l’Automobile for breaching the federations rules. A member of a rival team had passed over confidential information to a McLaren designer who then shared this with other members of the design team in order to gain a sporting advantage.
The court needed to establish whether the two elements of CTA 2009 s54 apply to this case.
The first element looks at whether the expense is incurred wholly and exclusively for the purpose of the trade. In this case the penalty was issued as McLaren had obtained information that could be used to enhance their vehicles which would benefit the trade. However, the penalty was not issued as part of the ordinary trade at McLaren. In regards to the second element of the legislation, and on the basis that the loss was incurred for the infraction of McLaren’s contract with the FIA rather than for the purpose of earning profits, it was determined that the penalty was not connected to McLaren’s trade.
Lord Hoffman notes that in his opinion a fine or penalty has the following purpose
‘to punish the taxpayer and a court may easily conclude that the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purpose of tax.’
Therefore, meaning that a penalty should not be considered to be an allowable expense of the business and therefore excluding any corporation tax relief on the penalty.
HMRC also specifically excludes the deduction of interest, penalties and surcharges arising from a range of their issued fines. One would imagine that this will be under the same reasoning as Lord Hoffman states above.
There are some exceptions to this rule in particular when an employee incurs a fine or penalty during the course of them carrying out their employment duties.
If an employee pays a fine, such as a parking ticket that they incurred whilst on company business and the employer reimburses this, then the reimbursement will become taxable benefit on the employee at their relevant income tax rates. As the value of the fine is subjected to income tax on the individual, the employer can deduct this as an allowable expense against their profits. If the car was owned by the employer and the employer pays the fine as the registered owner of the vehicle, this will also be an allowable deduction against the employer’s profits and there will be no income tax charge on the individual employee. Note that these rules do not apply to speeding tickets.
Careful consideration should be taken as to whether a fine or penalty is an allowable expense against profits of the business as each scenario should be assessed on its own merit as well as considering relevant case law and legislation.
If you are a company or business with taxable benefits arising from fines or penalties please contact a member of the Enterprise Tax Consultant team for more information. Alternatively read further tax cases.