HMRC have successfully appealed the 2012 decision of the First Tier Tribunal (FTT) that would have allowed F1 racing team McLaren tax relief on a £32 million fine imposed for cheating.
HMRC's Director General of Business Tax, Jim Harra, welcomed the ruling:
"We’re very pleased the Upper Tribunal agrees that the fine should not be given tax relief, which supports our view that most fines are not allowable as deductions against trading income. This case shows that we won’t hesitate to go to court to make sure the right tax is paid."
The £32 million penalty was imposed on McLaren by the sport’s governing body, the Fédération Internationale de l’Automobile (FIA) in 2007 for breaching its International Sporting Code.
The FTT ruled the penalty was tax-deductible. The Upper Tribunal (UTT) has now supported HMRC's appeal against that decision by ruling the penalty was not incurred 'Wholly and Exclusively' for the purposes of McLaren’s trade and was not an allowable deduction for tax.
Background
McLaren was caught with documents belonging to Ferrari. The World Motor Sport Council (WMSC) imposed a penalty of £32 million and even though the fine was 'huge' McLaren did not appeal.
Following the decision of the House of Lords in McKnight v Sheppard [1999] STC 669, where a stockbroker was not allowed tax relief on fines imposed by the Stock Exchange for misconduct, it was widely understood and accepted by advisers that if the purpose of a penalty or a fine is to punish, no tax relief is available because, as Lord Hoffman suggested in that decision, this would share the burden of a fine with the rest of the taxpaying community. Such a move was obviously unfair because the public were not the ones who committed any wrong. From Sheppard it seemingly makes no difference if what is imposed is a fine (usually statutory) or a penalty (usually non-statutory).
In McLaren, FTT Judge Charles Hellier took a different approach whilst also overruling Mr Dee who sat on the bench with him. Hellier’s approach was as follows:
- The public do not have an interest in the rules of a trade association in the same way that they do in something like the Law Society or other professional bodies (presumably the Stock Exchange as in the Sheppard case). Those bodies all protect the public from bad behaviour by their members. The WMSC is different, the public are not affected by the actions of it or its members.
- The fine was imposed because of the action of McLaren’s employees, so it followed that the action was in the course of its trade.
- The fine was for the use of Ferrari’s information, rather than its possession.
- The fine was not a punishment of McLaren personally, it was a deterrent.
- So the fine was an inherent risk of the trade.
Mr Dee’s opposing opinion was that:
- The huge sum was intended to punish serious misconduct and so was not wholly and exclusively incurred for the purposes of McLaren’s trade.
- The penalty could equally be disallowed on the grounds that it is a loss not connected with or arising out of the trade.
Comment
We commented following the FTT's decision that Judge Hellier's analysis could lead to interesting conclusions. Footballers may start trying to claim tax relief on fines imposed for bad behaviour on the pitch, athletes may try to deduct fines imposed for drug-taking and tennis player for swearing... So, a victory for common sense as well as for HMRC!
External links
UTT decision HMRC v McLaren Racing Limited [2014] UKUT 0269 (TCC)
FTT decision (now overruled): McLaren Racing Limited v HMRC [2012] TC02278
