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  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)|
|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)|