In HMRC v Peter Vaines [2016] UKUT 0002 (TCC), a partner in a law firm was disallowed tax relief on a payment made to avoid potential bankruptcy and to protect his reputation, it was not wholly and exclusively incurred for the purposes of the trade.

  • Mr Vaines was a partner in Squire, Sanders & Dempsey LLP ‘SSD’. He had also worked for another law firm Haarmann Hemmelrath (HH) which had gone bust, owing Bayerische Landesbank and other German banks some €17 million.
  • He negotiated a payment to the bank in order to release him from protracted legal claims through the German courts and possible bankruptcy.
  • He claimed tax relief for his payment, on his SA return against his income from SSD.
  • HMRC disallowed the claim on the basis that it was not wholly and exclusively incurred for the purposes of his partnership trade.

Mr Vaines appealed successfully to the First Tier Tribunal (FTT).

  • He argued that he was due tax relief as in a partnership it is the partners who are treated as carrying out the trade and not the firm itself … [so] that each partner is carrying on a trade albeit collectively with others and accordingly his profits are taxed on him individually.
  • The FTT accepted that the payment to Bayerische Landesbank had enabled him to avoid bankruptcy and protect his reputation and preserved and protected his professional  career.
  • It decided that a payment to protect a professional career was a type of expense that could be deducted and, finally, that it was not capital in nature.

HMRC appealed to the Upper Tribunal (UT).

  • The UT considered the relevant provisions of Part 9 of ITTOIA 2005 (partnerships) and found that SSD trade was carried on by all its members in common, however for the purposes of the self assessment basis period rules each partner is treated as carrying on a notional trade.
  • The payment was made by Mr Vaines personally not made by SSD.
  • Mr Vaines had negotiated by it, not SSD, and his previous engagement with HH had nothing to do with the business of SSD.
  • In considering section 34 (the wholly and exclusively rule) , the UT decided that protecting his professional career was not just a purpose but his only purpose and it was private. There is no basis under s34(2)for ‘apportioning’ the payment to attribute part of it to a sole trade purpose.
  • Finally, the payment was not capital.

HMRC’s appeal succeeded: the payment was not wholly and exclusively incurred.


At first sight one might have thought that Mr Vaines would have some hope following the decision in David McKnight (Inspector of Taxes) v Sheppard [1999] HL18 where a stockbroker’s legal costs in fighting disciplinary proceedings were held to be tax deductible on the basis that they protected his partnership’s ability to trade. The critical difference here was that Mr Vaines’s potential bankruptcy was a personal matter and it was unrelated firm's trade which had neither made the settlement payment nor had any hand in its negotiation.  

Link: HMRC v Peter Vaines [2016] UKUT 0002 (TCC)


Mr Vaines appealed to the Court of Appeal who upheld the decision of the Upper tribunal finding that:

  • The legislation treats the collective trade of a partnership as if it were the trade of a single individual.
  • There is no such thing as an individual partner's trade and therefore no possibility of expenditure being incurred for the purpose of that partner's trade".

Link: Peter Vaines v HMRC [2018] EWCA Civ 45