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HMRC internal manual

Business Income Manual

Wholly and exclusively: fines, penalties and damages: cost of defending charge of breach of contract

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

Costs of defending trade assets are allowable - costs of defending personal reputation are not

The cost of defending title to trade or professional assets is generally allowable - see for example Southern v Borax Consolidated [1940] 23 TC 597 (see BIM35540). The costs, for example, of defending personal reputation are not allowable because of duality of purpose (see BIM37965). Whether there is duality of purpose is essentially a question of fact.

In the case of Knight v Parry [1972] 48 TC 580 (see also BIM37960), Mr Parry was employed as an assistant solicitor by the firm of F O Sanders. One of Mr Sanders’ clients suggested that Mr Parry should set up and practice in his own account, in which event that client would instruct Mr Parry to act for them. Mr Parry agreed and set up in practice taking Mr Sanders’ client.

Mr Sanders complained to the Law Society that Mr Parry had solicited Mr Sanders’ client’s business. The Law Society agreed that there was a prima facie case of professional misconduct and invited Mr Sanders to take proceedings in the courts before they would consider the matter further.

In the ensuing action, Mr Sanders failed to prove professional misconduct but was awarded damages against Mr Parry. The grounds for the award being that Mr Parry in agreeing to undertake the business in question was in breach of his contract of employment.

The General Commissioners allowed the costs of defending the action as a deduction against Mr Parry’s trading profits.

The High Court disallowed the costs because:

  • Mr Parry’s purpose in protecting himself professionally was not wholly and exclusively referable to the carrying on of his practice but was for seeing that he was not precluded from doing so, and
  • there was a duality of purpose to the expenditure, in that the defence of the action was also to contest the claim for damages for breach of contract of employment