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HMRC internal manual

Business Income Manual

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 [1999] 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