In TR, SP and SR Rogers v HMRC [2021] TC08342, the First Tier Tribunal (FTT) found that legal expenses incurred by a partnership in defending a partner against a specific criminal charge were incurred wholly and exclusively for the purpose of the partnership’s trade.

  • Mr S Rogers and his parents ran a scrap metal business in Partnership.
  • Thames Valley Police undertook an operation that involved undercover officers attempting to sell property that was implied to be stolen.
  • This operation resulted in criminal charges being brought against Mr S Rogers, Mr T Rogers and a number of employees.
    • Mr T Rogers was found not guilty at the first trial.
    • Mr S Rogers was initially found guilty of one count of attempting to conceal, disguise or convert criminal property, but this conviction was successfully appealed at the Court of Appeal.
  • Legal costs defending the charges amounted to £543,091 in 2013-14 and £61,240 in 2014-15. These were claimed by the partnership as a deduction from trading profits.
  • Following an enquiry, HMRC disallowed the legal fees on the basis that they were not incurred Wholly and exclusively for the purposes of the partnership’s trade.
  • After a HMRC review, the partnership Appealed to the First Tier Tribunal (FTT).

Section 34 ITTOIA 2005 denies a deduction from trading profits where expenses are not incurred wholly and exclusively for the purposes of the trade.

HMRC contended that the legal expenses incurred by the partnership had an intrinsic duality of purpose as there were three underlying motives:

  • Defence of liberty: preventing a prison sentence.
  • Defence of personal reputation.
  • Defence of trade: this element being for the benefit of the trade.

The FTT found in favour of the partnership, agreeing that the legal expenses were incurred wholly and exclusively for the purposes of the trade:

  • Mr Rogers had been told by his lawyers he had a strong case. It was unlikely he ever considered that he would go to prison.
    • Defence of liberty was not a concern.
  • The damage to Mr Rogers’ personal reputation was primarily done at the time of the police operation when it was covered on local news.
    • Personal reputation was not relevant when deciding whether to incur the legal fees.
  • A conviction would have had a significant impact on the ability to continue trading. The partnership’s:
    • Premises lease would have been terminated.
    • Scrap metal dealer’s licence was unlikely to have been granted.
    • Business would not have been insurable.
    • Banking services would have been withdrawn.
    • Customers and suppliers may have ceased to deal with them.

Although the successful Court of Appeal decision had a positive impact on the personal reputation of Mr Rogers, this was an effect of, rather than a reason for, the expenditure being incurred.

The purpose of the expenditure was to protect the business: it was wholly and exclusively incurred for the purposes of the trade.

Useful guides on this topic

Wholly and exclusively…toolkit
What does 'wholly and exclusively' mean? How do you determine if a cost is wholly and exclusively incurred for the purpose of a trade? What cases are there? 

Legal fees in personal defence
There are two contrasting cases on whether legal fees incurred in cases that affected both personal and business reputation are 'wholly or exclusively'  for the purposes of the business.

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

When does a partnership exist?
When does a partnership exist? Why does it matter? What are the implications for different taxes?

Partnerships: How to prepare partnership and partners tax returns
How to prepare partnership returns. How are partnership profits calculated? How are corporate members of partnerships taxed? What are the differences between the tax treatment of individual and corporate partners? Are there anti-avoidance provisions to consider?

External link

TR, SP and SR Rogers v HMRC [2021] TC08342

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