Legal expenses incurred in the normal day to day conduct of the
trade are likely to be allowable. The costs of entering, amending
or leaving a trading contract (unless such contract is in the class
covered in the guidance at
BIM35530) are allowable. The costs
arising from a breach of the law are not allowable. Costs incurred
to compromise an action alleging breach of the law are also not
allowable.
The case of Cattermole v Borax & Chemicals Ltd [1949]
31TC202, concerned a claim to deduct legal and other expenses
incurred in connection with legal action in the USA. Under an
indictment in an American court, Borax & Chemicals Ltd, its
managing director, the American parent company (the American Potash
and Chemical Corporation), and certain others were charged with
offences against the Sherman (‘anti-trust’) Act.
The American company wished to settle the case without court
proceedings. Although Borax & Chemicals Ltd and its managing
director were not obliged to submit to the jurisdiction of the
American court, they agreed to do so at the request of the American
company in order to facilitate its negotiations. A compromise
settlement was reached, involving fines on Borax & Chemicals
Ltd and its managing director. Borax & Chemicals Ltd also
incurred the costs of legal advice taken in the UK before deciding
to submit to the jurisdiction of the American court, and the
expenses of a visit to America by the managing director. Borax
& Chemicals Ltd was assessed to IT without the allowance of any
deduction for the fines and other expenses, and appealed to the
General Commissioners, contending that the payments were
‘wholly and exclusively expended for the purposes of the
trade’. The Commissioners allowed the appeal.
The High Court decided that the payments in America were not
admissible deductions for IT purposes. The High Court allowed the
legal expenses incurred in the UK.
Croom-Johnson, J began by saying that the fact that
proceedings took place in the USA was irrelevant. He then explained
that because the payments served the purpose of compromising legal
proceedings, against themselves and their US parent, they were not
deductible, 31TC upper half of page 210:
I can see no distinction in law as to whether
the proceedings were proceedings to recover sums of money of this
sort pursued in an American court or in an English court. I think
that is one of the matters on which the Commissioners here have not
really applied their minds to the right problem. The question is
what in fact were these payments, and are they shown in fact to be
wholly and exclusively expended for the purposes of the trade of
the Company - ‘wholly and exclusively laid out and expended
for the purposes of the trade’. I will leave out the rest of
the words.
Where I think the Commissioners have gone
wrong is this. They have not given sufficient value to the words
‘wholly and exclusively’. They seem to have looked at
the reason which was given for the submission to the jurisdiction
in the United States and have failed to attach sufficient
importance to the question, after the submission to the
jurisdiction, as to what the sum of money was paid for. It was paid
for a compromise of legal proceedings in the United States to which
I will assume for good business reasons they had voluntarily
submitted themselves. But that is not what I have to
decide.
Croom-Johnson J then explains that the legal expenses incurred in London for advice in connection with the trade is allowable, 31TC foot of page 211 and head of page 212:
Then there is a little item of £28 for legal expenses in London…I am bound to say that in circumstances like the present I think it would be extremely difficult to hold that a sum of money paid by the directors in London for legal advice as to what they should do is not an expenditure connected with their trade. I do not propose to spend very long on this but it looks to me as if it were possible, on the reasoning of the Spofforth case [see BIM37955], to allow some amount of costs incurred by the directors in London for the purpose of seeking advice as to whether they should put their heads in the lion's mouth.
