Penalties incurred for breaching the law are not allowable.
In the case of CIR v EC Warnes & Co Ltd [1919] 12TC227,
the company, which carried on the trade of oil merchants, was sued
for a penalty on an Information by the Attorney-General under
Section 5(1) of the Customs (War Powers) Act, 1915, for breach of
certain orders and proclamations relating to the requirements of
the Board of Customs and Excise with respect to a consignment of
oil shipped by the company to Norway. The action was settled by
consent on the agreement of the company to pay a mitigated penalty
of £2,000, such sum to cover the costs of the Crown, and on
all imputations as to the company's moral culpability being
withdrawn, and judgement was entered for the Crown accordingly. In
defending the proceedings the company incurred £560 legal
costs.
The General Commissioners allowed the expenses claimed. The
High Court decided that the mitigated penalty and costs were not
losses connected with and arising out of the company's trade within
the meaning of what is now ICTA88/S74 (1)(e). They were therefore
not deductible in arriving at the profits of the company's trade
for Excess Profits Duty purposes.
In the High Court Rowlatt J expressed the view that a penal
payment for infringement of the law could not be a loss arising out
of the trade.
For those who do not have ready access to tax case volumes,
the part of Rowlatt J’s judgement on which the above guidance
is based is set out below, 12TC foot of page 231 and head of page
232:
I may shelter myself behind the authority of Lord Loreburn, who, in his judgment in the House of Lords in Strong & Co. v Woodifield [see BIM38510], said that it is impossible to frame any formula which shall describe what is a loss connected with or arising out of a trade. That statement I adopt, and I am not sure that I gain very much by going through a number of analogies; but it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade. I think that a loss connected with or arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable, and in the nature of a commercial loss. I do not intend that to be an exhaustive definition, but I do not think it is possible to say that when a fine, which is what it comes to, has been inflicted upon a trading body, it can be said that that is ‘a loss connected with or arising out of’ the trade within the meaning of this Rule. As I say, it is impossible to say what is such a ‘loss’, but I have a clear view that this is not, and I can say no more than that.
