The costs of civil damages arising as a result of normal trading
operations are generally allowable. For example you should allow
damages awarded against a publication for libel. But civil damages
arising outside the normal course of the trade are not allowable.
In the case of Fairrie v Hall [1947] 28TC200, J L Fairrie, a
sugar broker, was selling agent in London for Galban Lobo, S.A, a
Cuban company. W J Rook, who was connected with a rival Cuban
company, Cuban Trading Company of Havana; was also deputy director
of sugar supplies at the Ministry of Food.
Fairrie disagreed with the buying policy of the Ministry as
adversely affecting the interests of Galban Lobo, SA and himself.
In consequence of communications passing between Fairrie and Galban
Lobo, SA concerning the disagreements, Rook brought an action in
the High Court against Fairrie for libels contained in those
communications.
The Courts held that Fairrie had acted maliciously and that
the defence of privilege could not prevail, and awarded damages and
costs against him amounting to some £3,500.
On appeal, Fairrie contended that the expenditure was laid
out wholly and exclusively for the purposes of his trade, or was a
loss connected with or arising out of the trade, and was therefore
allowable as a deduction in computing the profits for IT and Excess
Profits Tax purposes. The Special Commissioners dismissed the
appeal.
Held, that the Special Commissioners had reached the correct
conclusion, the sums were not deductible.
Macnaghten, J found that the expenditure was not allowable,
using the capacity test (see
BIM37300), 28TC foot of page 205 to head
of page 206:
In the present case the loss which the
Appellant has sustained,£550 damages and £3,025 costs, is
in one sense a loss connected with his trade. Apart from his desire
to injure Mr. Rook, the Appellant also desired to increase his own
profits. He had that motive. He could only have increased his
profits if he succeeded in giving an advantage to his own clients
in Cuba or a disadvantage to the rivals of his clients. It is a
case that falls, it seems to me exactly within the words of Lord
Loreburn [see Strong and Co of Romsey Ltd,
BIM38510]
who said that the losses ‘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 loss fell upon the Appellant in this case in the
character of a calumniator of a rival sugar broker. It was only
remotely connected with his trade as a sugar broker.
The case seems to me to be plain beyond all
possible doubt, and, bearing in mind that at that date the standard
rate of Income Tax was ten shillings in the pound, it would indeed
be preposterous if the Appellant were allowed to deduct these sums
and thus be enabled to share equally with the public revenue the
loss to which he was condemned in the judgment of Atkinson,
J.
You should note the sentiment in the latter remarks that found an echo in Lord Hoffman’s explanation of the public policy reason for not allowing a deduction for fines and penalties given in McKnight (see BIM37965).
