HMRC internal manual

Business Income Manual

BIM42515 - Specific deductions: administration: fines

A fine incurred as a result of a trader’s infraction of the law is not allowable on the authority of CIR v Alexander von Glehn Ltd [1920] 12TC232, as it is not incurred wholly and exclusively for the purpose of the trade.

Lord Hoffman, in the case of McKnight v Sheppard [1999] 71TC419, noted that the Court of Appeal in the von Glehn case was:

‘curiously inarticulate about why the fine was not money expended for the purposes of the trade.’

He went on to note that, in his opinion, the reason related to the character of a fine or a penalty:

‘Its purpose is to punish the taxpayer and a court may easily conclude that the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purposes of tax.’

However, this does not apply to damages that are compensatory, rather than punitive, in character. For example, damages for defamation payable by a newspaper company, where such claims are ‘a regular and almost unavoidable incident of publishing it’.

Where an employer pays fines that are the liability of an employee, so that the employee is taxable on the payment as employment income, the cost to the employer of paying the fines is allowable in computing his trading profits.

Parking fines

A situation in which an employer pays, or reimburses, a parking fine which is the employee’s liability should be dealt with as above. The fine will be the employee’s liability if the penalty notice was actually handed to him or her at the time of the offence, or if the employee owns the car. In such circumstances a deduction may be allowed to the employer for the fine paid on behalf of the employee.

But if the notice was fixed to a car owned by the employer, and the employer pays the fine as the registered owner, an employment income charge will not arise to the employee. The fine should then be disallowed in computing the employer’s taxable profit. If the employee voluntarily pays a fine in these circumstances, and the employer reimburses it, the employee will be chargeable to tax the reimbursement as earnings. A deduction for the expense may then be allowed to the employer.

Regulatory bodies

Where a trader incurs a liability to a regulatory body on revenue account that is broadly intended to cover the regulator’s costs of performing its duties in relation to the trading activities, such costs will normally be allowable even where the trader has committed a breach of regulations. However, should a regulatory body impose a penalty for breach of regulations, or should a penalty or fine become payable as a result of a prosecution for a trader’s breach of regulations, this will not be an allowable expense (see McKnight v Sheppard [1999] 71TC419).

Civil proceedings

A revenue payment, in settlement of a civil action arising out of a trade, may be allowed as a trading deduction where the allegations were neither admitted nor proved (see Golder v Great Boulder Proprietary Goldmines Ltd [1952] 33TC75). Where liability was admitted or proved, a deduction may be allowed where the payment was restitutionary, but not if it was punitive.

Other penalties etc

For guidance on interest, penalties and surcharges on UK taxes see BIM42520 and on interest and penalties on overseas tax see BIM45901.