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Fines – Business Expense or Not?

A recent tax case involving the McLaren racing team highlights the grey area that surrounds the tax treatment of fines for breaches of member rules in commercial groupings.

McLaren was found to have breached several regulations laid down by the Formula One authorities. By way of penalty, it was fined all of its prize money for 2007 and a further £32 million.

McLaren claimed the £32 million was a business expense in its tax computations and thus claimed a tax deduction for it.

The Upper Tribunal considered that the penalty was incurred for a knowing breach of the agreement under which McLaren participated in Formula One racing and that the penalty was therefore not the result of its normal business activity. It therefore did not qualify as an expense ‘wholly and exclusively for the purposes of the trade’ and hence was not deductible for Corporation Tax purposes.

The case is apparently not going to be appealed.

It is a long-established principle that fines levied by authorities (e.g. parking fines) are not deductible expenses for tax purposes. This case appears to widen that interpretation somewhat.