BIM38500 - Wholly and exclusively: fines, penalties and damages: contents

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

Introduction and layout of guidance

The courts have considered many cases where the issue has been the deductibility of a fine, a penalty or damages. The statutory test under S34(1)(a) Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses and S54(1)(a) Corporation Tax Act 2009 for companies is whether the expense was incurred wholly and exclusively for the purposes of the trade, profession or vocation. This involves mainly factual issues and the importance of establishing the facts before entering into argument cannot be overstressed.

Where a penalty is intended as punishment then it will not be allowable on the rationale set out by Lord Hoffmann in McKnight v Sheppard [1999] 71 TC 419 (see BIM37965). Where the payment is intended to provide restitution for damages caused by normal trading operations then it will be allowable.

The guidance that follows describes a number of the cases that have come before the courts

BIM38510 Compensation for injury to customer (Strong & Co of Romsey Ltd v Woodifield)
BIM38515 Penalties for infractions of the law are not allowable (CIR v EC Warnes & Co Ltd)
BIM38520 Penalties for infractions of the law are not allowable (further discussion) (CIR v Alexander von Glehn & Co Ltd)
BIM38522 Confiscation orders
BIM38525 Costs incurred in settling an action for breach of the law (Cattermole v Borax & Chemicals Ltd)
BIM38530 Cost of libel action (Fairrie v Hall)
BIM38535 Payment to get director to withdraw legal action (G Scammell G & Nephew Ltd v Rowles)
BIM38540 Cost of settling civil action, trade purpose? (Golder v Great Boulder Proprietary Gold Mines Ltd)
BIM38545 Cost of defending charge of breach of contract (Knight v Parry)
BIM38550 Compromise settlement of action by former director (Hammond Engineering Co Ltd v CIR)
BIM38560 Application of hindsight (Simpson v James)