A fine incurred as a result of a trader's infraction of the law
is not allowable on the authority of CIR v Alexander von Glehn Ltd
[1920] 12TC232, as it is not incurred wholly and exclusively for
the purpose of the trade.
Lord Hoffman, in the case of McKnight v Sheppard [1999]
71TC419, noted that the Court of Appeal in the von Glehn case
was:
" curiously inarticulate about why the fine was not money expended for the purposes of the trade."
He went on to note that, in his opinion, the reason related to the character of a fine or a penalty:
" Its purpose is to punish the taxpayer and a court may easily conclude that the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purposes of tax."
However, this does not apply to damages that are compensatory,
rather than punitive, in character. For example, damages for
defamation payable by a newspaper company, where such claims are "
a regular and almost unavoidable incident of
publishing it".
Where an employer pays fines that are the liability of an
employee, so that the employee is assessable on the payment as
employment income, the cost to the employer of paying the fines may
be allowable in computing his trading profits.
A situation in which an employer pays, or reimburses, a parking
fine which is the employee's liability should be dealt with as
above. The fine will be the employee's liability if the penalty
notice was actually handed to him or her at the time of the
offence, or if the employee owns the car. In such circumstances a
deduction may be allowed to the employer for the fine paid on
behalf of the employee.
But if the notice was fixed to a car owned by the employer,
and the employer pays the fine as the registered owner, an
employment income charge will not arise to the employee. The fine
should then be disallowed in computing the employer's taxable
profit. If the employee voluntarily pays a fine in these
circumstances, and the employer reimburses it, the employee will be
chargeable on the emolument arising. A deduction for the expense
may then be allowed to the employer.
A revenue payment, in settlement of a civil action arising out of a trade, may be allowed as a trading deduction where the allegations were neither admitted nor proved (see Golder v Great Boulder Proprietary Goldmines Ltd [1952] 33TC75). Where liability was admitted or proved, a deduction may be allowed where the payment was restitutionary, but not if it was punitive.
For guidance on VAT penalties see BIM31610 - BIM31615 and on interest and penalties on overseas tax see BIM45901.
