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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: losses: defalcation by employee

Thefts by employees are deductible, whereas thefts by directors or partners are not deductible

Losses arising from theft or misappropriation by an employee are normally allowable.

For this purpose you should not regard a director as an employee. The proprietor of the business (sole trader or partner) is also not an employee. Therefore, losses arising from theft/misappropriation by directors or business proprietors are not allowable. See Curtis v J & G Oldfield Ltd [1925] 9 TC 319 (see BIM37810) and Bamford v ATA Advertising Ltd [1972] 48 TC 359.

For guidance on the meaning of director see EIM20200 onwards.