Is a fine tax deductible?

McLaren – the British Formula One motor racing team - has successfully argued that a £34m fine it had to pay for cheating is tax deductible.

The shock ruling was made by Judge Charles Hellier at the First Tier Tribunal Tax Chamber and centred on an episode in 2007 when McLaren was ordered by the sport’s ruling body, the Federation Internationale de L’Automobile (FIA) to pay £32m and “suffer a reduction in its gross income of some £34m”.

The punishment was imposed because “it had possessed and in some way used proprietary information belonging to Ferrari, and had thereby breached the rules of the FIA’s International Sporting Code to which McLaren was contractually bound”.

Speaking on BBC Radio 4’s Today programme, its sports correspondent Gordon Farquhar said the incident had been dubbed “Spygate” when industrial espionage swept through the world of F1.

He said a whistle-blower working at a photocopying company had been asked to copy an 800 page document belonging to Ferrari at the behest of someone from McLaren. He duly tipped off the Italian team, which set in train a series of events that “led to resignations, fines and dented reputations”.

Details of the technical designs and the workings of Ferarri’s 2007 cars were then passed onto a McLaren engineer, said Farquhar. McLaren initially said it was just one individual working alone, and none of the information was used to gain a competitive advantage. However, it later emerged that “knowledge of the information was far more widely spread and the sport’s governing body took a pretty dim view and decided to make an example of the team and hit them with a fine”.

Farquhar said McLaren was then slapped with a fine and had points withdraw from a constructor’s championship they had won that year. He added that during that period there were allegations that Renault had been taking secrets from McLaren, and there was an impression that this sort of thing was quite widespread – this overt case.

Julian Hedley, a partner of Saffrey Champness, said:

‘The tribunal decided it was a business expense on the basis that it was not a statutory fine for breaking the law, but was a penalty incurred under the rules governing McLarens participation in F1.’

‘You had to look at it as was it a tax deductible expense i.e. was it wholly and exclusively incurred for the purposes of the trade, or was it a loss that was connected with, or arose out of, the trade?’

‘HMRC argued that the definition of trade surely can’t encompass an act which is an infringement of the civil law rights of another person. What was decided by Judge Hillier was that if you look at the trade, the only reason McLaren was fined was because they had signed up to the Concorde agreement, which allowed them to participate in F1, and therefore it was a fine related to that trade.’

A spokesman for HMRC, said:

‘HMRC is currently considering the decision which concerns whether a fine issued to the company is a deductible expense, and will decide whether to appeal in due course.’