As a general rule, damages incurred as a result of normal
trading operations are allowable. Penalties for infraction of the
law are not.
Strong & Co of Romsey v Woodifield [1906] 5TC215, is
referred to at
BIM37300 in connection with the
so-called ‘capacity’ test.
Strong & Co of Romsey Ltd was a brewing company and it
owned licensed houses and carried on the trade of innkeepers as
well as brewers. Trade at the particular inn involved in the case
was conducted through a manager. A customer sleeping in the inn was
injured when a chimney fell on him. The chimney fell because the
brewery failed to ensure that its servants discharged their duty to
see that the premises were in proper condition. The brewery had to
pay £1,490 in costs and damages. The brewery claimed the
damages as a deduction in computing its profits. The House of Lords
denied a deduction for the expenditure.
Lord Davy explaining, 5TC page 220:
I think that the payment of these damages was not money expended ‘for the purpose of the trade’. These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, &c. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits.
Lord Davy’s remarks have been quoted with approval in many
subsequent decisions. But judges have also warned against applying
them in too narrow a sense.
The Lord Chancellor, Earl Loreburn, described the statutory
provisions and their effect, 5TC lower half of page 219:
A deduction cannot be allowed on account of
losses not connected with or arising out of such trade. That is one
indication. And no sum can be deducted unless it be money wholly
and exclusively laid out or expended for the purposes of such
trade. That is another indication. Beyond that the Act is
silent.
In my opinion, however, it does not follow
that if a loss is in any sense connected with the trade, it must
always be allowed as a deduction; for it may be only remotely
connected with the trade or it may be connected with something else
quite as much as or even more than with the trade. I think only
such losses can be deducted as are connected with it in the sense
that they are really incidental to the trade itself. They cannot be
deducted if they are mainly incidental to some other vocation, or
fall on the trader in some character other than that of trader. The
nature of the trade is to be considered.
Lord Loreburn’s words bring to mind ICTA88/S74 (1)(e)
[which refers to ‘
any loss not connected with or arising out of
the trade…’]. However in later cases judges have
applied Lord Loreburn’s words to the phrase in ICTA88/S74
(1)(a),
‘expenses laid out or expended for the
purposes of the trade’.
Notwithstanding the above decision, you should allow a trader
the costs of civil damages for injury to others caused by day to
day trading operations. You should disallow any penalty for
infraction of the law.
