BIM38530 - Wholly & exclusively: fines, penalties and damages: cost of libel action
Civil damages stemming from day to day trading operations are allowable - but a penalty for breaching the law is not
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  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).