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F1 team argues over whether a £32m fine should be tax deductible.

In June, Formula 1 racing giant, McLaren, went before the Upper Tribunal claiming that a £32m fine imposed by the sport’s governing body – the Fédération Internationale de l’Automobile (FIA) – in 2007 for spying should be tax deductible.

The First Tier Tribunal ruled in 2012 that the fine was tax deductible on the basis that cheating was an everyday part of the racing trade and spying counted as an activity ‘so closely associated with the mainstream of McLaren’s trade that I cannot say they were not part of it’.

McLaren continued to argue that the fine was not a statutory penalty but one incurred under Formula 1 rules, therefore making it a business expense.

However, the Upper Tribunal has ruled that obtaining information by breaching regulations does not qualify as a normal business activity and has supported HMRC’s appeal by ruling that the penalty was intended to punish serious misconduct and so was not wholly and exclusively incurred for the purposes of McLaren’s trade.

It is generally accepted by advisers that if the purpose of a penalty or fine is to punish, then no tax relief is available. As the purpose is to punish the taxpayer, 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 purposes of tax.

Tax deductible fines/penalties: 

  1. Payments for damages that are compensatory rather than punitive are tax deductible. That includes, for example, damages for defamation payable by a newspaper company, where such claims are ‘a regular and almost unavoidable incident of publishing’.
  2. Employers settling the employee’s liability. Where an employer pays fines that are the liability of an employee, so that the employee is taxable on the payment as employment income, the cost to the employer of paying the fines is allowable in computing his trading profits.
  3. Payments to a regulatory body that are broadly intended to cover the regulator’s costs of performing its duties in relation to trading activities. Such costs will normally be allowable even where the trader has committed a breach of regulations. However, penalties/fines for a breach of regulations or as the result of a prosecution for a trader’s breach of regulations will not be an allowable expense.
  4. Payments in settlement of a civil action arising out of a trade may be allowed as a trading deduction where the allegations were neither admitted nor proved. Where liability was admitted or proved, a deduction may be allowed where the payment was restitutionary, but not if it was punitive.

Article contributed by ACCA