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HMRC internal manual

Business Income Manual

Wholly and exclusively: fines, penalties and damages: cost of libel action

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

Civil damages stemming from day to day trading operations are allowable - but a penalty for breaching the law is not

The costs of civil damages arising as a result of normal trading operations are generally allowable. For example, you should allow damages awarded against a publication for libel. However, civil damages arising outside the normal course of the trade are not allowable.

In the case of Fairrie v Hall [1947] 28 TC 200, a sugar broker was a selling agent in London for Galban Lobo SA (a Cuban company). Mr Fairrie disagreed with the buying policy of the Ministry of Food as he believed it was adversely affecting the interests of Galban Lobo SA and himself. The deputy director of the Ministry of Food was Mr Rook, who was connected with a rival Cuban company, Cuban Trading Company of Havana.

In consequence of communications passing between Mr Fairrie and Galban Lobo SA concerning the disagreements, Mr Rook brought an action in the High Court against Mr Fairrie for libels contained in those communications.

The Courts held that Mr Fairrie had acted maliciously and awarded damages and costs against him amounting to some £3,500.

On appeal, Mr Fairrie contended that the expenditure was laid out wholly and exclusively for the purposes of his trade, or was a loss connected with or arising out of the trade. The Special Commissioners dismissed the appeal.

The High Court held that the Special Commissioners had reached the correct conclusion. The sums were not deductible.

Macnaghten J found that the expenditure was not allowable using the capacity test (see BIM37300). See page 206:

`In the present case the loss which the Appellant has sustained,£550 damages and £3,025 costs, is in one sense a loss connected with his trade. Apart from his desire to injure Mr Rook, the Appellant also desired to increase his own profits. He had that motive. He could only have increased his profits if he succeeded in giving an advantage to his own clients in Cuba or a disadvantage to the rivals of his clients. It is a case that falls, it seems to me exactly within the words of Lord Loreburn [Strong and Co of Romsey Ltd v Woodifield [1906] 5 TC 215, see BIM38510] who said that the losses “cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader.” The loss fell upon the Appellant in this case in the character of a calumniator of a rival sugar broker. It was only remotely connected with his trade as a sugar broker.’

You should note the sentiment in the latter remarks that found an echo in Lord Hoffmann’s explanation of the public policy reason for not allowing a deduction for fines and penalties given in McKnight v Sheppard [1999] 71 TC 419 (see BIM37965).