McLaren’s FIA Fine Not Wholly and Exclusively for Trade

We wrote previously regarding the First-Tier Tribunal case of McLaren Racing Ltd v HM Revenue & Customs, where the Tribunal found that the fine relating to spying on Ferrari (which amounted to around £34m) was deductible because the act in question was wholly and exclusively for the purposes of trade and no laws were broken.

HMRC appealed the case to the Upper Tribunal who found that the fine had been incurred because McLaren engaged in conduct not in the course of its trade.  The penalty was found therefore to be a disbursement or expense, but not paid wholly and exclusively for the purposes of the company’s trade. It was therefore not an allowable deduction against their profits for corporation tax.

The outcome of the original Tribunal case was somewhat surprising, and this decision therefore appears to be more in line with previous case law.  This is a shame as the First-Tier Tribunal case had suggested that the scope of the “wholly and exclusively” rules might have been wider than previously thought.  Bearing in mind the amount of tax at stake, it is possible however, that McLaren could seek to appeal the decision.

Bank Settlement – Wholly and Exclusively

The recent tribunal case of Mr Vaines v HMRC (TC02965) dealt with whether a deduction from trading profits was allowed under the ‘wholly and exclusively’ principles, for an out of court settlement of a bank claim relating to a previous trade.

If the claim was not settled the taxpayer could be made bankrupt thus preventing him from continuing in his current trade.

Background

The taxpayer, Mr Vaines, was a member of Harrmann Hemmelrath LLP, a German law firm with offices in London, until 31 December 2005.

The taxpayer subsequently became a partner in Squire Sanders & Dempsey.

On 27 October 2009 the taxpayer made an amendment to his tax return for 2007/08, claiming a deduction of £215,455 against his professional income from Squire Sanders & Dempsey.

The deduction claimed was for a payment made to a German bank, under an agreement made by a number of individuals who were connected with his previous law firm, Haarmann Hemmelrath.  The firm had ceased to trade and owed approx. €17m to a number of German Banks.

The taxpayer believed that the risk of challenging the banks through the German courts was unacceptably high; as if he lost he would be made bankrupt.

If made bankrupt he would lose his current position as partner at Squire Sanders & Dempsey.

Following negotiations with the bank, he agreed to pay them €300,000 (£215,455) in full and final settlement of all claims.  This was paid in January 2008 (tax year 2007/08).

An amendment was made to his 2007/08 tax return and a deduction from his professional income from Squire Sanders & Dempsey claimed.

HMRC denied a deduction primarily on the basis that the payment was not wholly and exclusively for the purposes of his trade.

HMRC’s Arguments

HMRC argued that the deduction should not be allowed for three reasons:

  1. Mr Vaines did not carry on a profession or a trade as an individual,
  2. If he did carry on a trade individually the payment was not wholly and exclusively for the purposes of the trade as it also enabled him to avoid bankruptcy and preserve his reputation, and
  3. If it was wholly and exclusively, it was capital and not revenue expenditure and therefore no deduction was allowed

Tribunals Conclusions

1. Trading as an Individual

 HMRC had tried to rely on a case that predated self-assessment. However this case was found to be superseded by ITTOIA s.862, which states that members of an LLP are treated as carrying out the trade and not the partnership itself.

The tribunal therefore dismissed HMRC’s argument that Mr Vaines did not carry on a trade in his own right.

2. Wholly & Exclusively

The tribunal held that as a matter of fact the purpose of Mr Vaines making the payment was to preserve and protect his professional career or trade.

With this in mind the case of Morgan (Inspector of Taxes) v Tate & Lyle Ltd (1955) states that ‘money spent for the purposes of preserving the trade from destruction can properly be treated as wholly and exclusively expended for the purposes of the trade’.

As a result they found that the payment to the Bank was wholly and exclusively for the purposes of his trade.

3. Revenue or Capital?

The final consideration was whether the payment was revenue or capital.  HMRC contended it was capital and therefore no deduction was allowed.

Mr Vaines argued that no asset or enduring advantage was brought into existence by the payment made to the Bank and as a result it was a revenue expense.

He relied on Lawrence J in Southern (HM Inspector of Taxes) v Borax Consolidated Ltd (1940) where he stated;

‘..if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue’ and ‘it appears to me that the legal expenses which were incurred…did not create any new asset at all but were expenses which were incurred in the ordinary course of maintaining the assets of the Company, and the fact that it was maintaining the title…does not, in my opinion make it any different’

The tribunal found that as the payment was to preserve and protect his professional career or trade it must follow that it is a revenue and not capital payment in line with the case above.

Decision

As a result the appeal was allowed and the payment found to be wholly and exclusively for the purposes of his trade.

Wholly and exclusively test and duality of purpose – Healy v CRC

The rules on whether expenditure may be allowed as a deduction under the ‘wholly and exclusively’ principles can often be contentious.  This is demonstrated by the number of cases taken to the courts to determine such disagreements.

The recent Upper Tier Tribunal case of Healy v CRC has added further material to the case law on the subject, and due to the outcome promises more to come as it has been referred back to the First Tier Tribunal.

The case concerned professional actor, Tim Healy, and whether or not the cost of his accommodation in London was an allowable expense.  The First-tier Tribunal had allowed his original appeal on the basis that he had not been looking for a permanent home in London.

HMRC appealed, arguing that the tribunal had erred in law by ignoring whether or not Mr Healy had a duality of purpose when incurring the costs as it met the need for warmth and shelter than he ordinarily had.

The Upper Tier Tribunal agreed that by failing to address this point the Tribunal had erred in law.  Based on the facts available to them, they did not have the necessary detail to determine the case.  It was therefore remitted to the First-tier Tribunal for a new hearing.

The outcome of the re-heard case could have wider implications for the self-employed and so it will be interesting to see how the case develops.  In the meantime, it is important to take care in this area and take each case on its own merits.

HMRC Wins Important Business Travel Expenses Case: Dr Samadian

A recent test case was heard by the tax tribunal regarding whether certain business travel expenses were allowable, in terms of the interpretation of the “wholly and exclusively” rules.

Summary

Dr Samadian worked full time as an employee for the NHS at two hospitals in London and had a permanent NHS office. He also worked at two private hospitals holding weekly out-patient sessions.

The tribunal acknowledged that Dr Samadian had a dedicated office in his home which was necessary for his professional activity; however the Tribunal did not accept that Dr Samadian’s home office could be treated as the start for calculating his allowable private practice business mileage for habitual journeys.

The decision could potentially have an impact on all self-employed professions in cases where there is a home office and another business base from which they operate on a regular basis.

Taxpayer’s Case

The taxpayer argued that the business base should be regarded as the place from which the business is run and not the place where the professional services are carried out (as was argued by HMRC).

In particular the taxpayer said there was no general principle that meant any travel to/from a taxpayer’s home must always be disallowable due to having an element of non-business duality. He said that each case should be judged on its own facts.

The taxpayer submitted that on the facts, his home was the business base and therefore there was no non-business purpose in his travel between the home and the private hospitals.

HMRC’s Case

HMRC’s argument was that the cost of travelling to and from home and a place of work is generally not allowable as the journeys are not wholly and exclusively for business.

The motive, object and purpose of Dr Samadian’s disputed journeys were to take him from his home, where he lives, and to then undo this journey.

Past Cases Considered

The tribunal considered various cases put forward by the taxpayer and HMRC, however rather unusually they also considered an additional case – Mallalieu v Drummond, with a view to explain the statutory words “expended for the purposes of the trade”.

Mallalieu related to a claim for professional clothing for use in court by a barrister. The tribunal concluded that this claim had failed “because although she had conscious motive for incurring the expenditure which was not a business motive, the facts were such that there must necessarily have been a non-business motive in her mind as well”

The judge felt this case made it clear that it was possible for him to “look behind the conscious motive of a taxpayer where the facts are such that an unconscious object should also be inferred”.

Tribunal Ruling

The tribunal accepted that Dr Samadian has a place of business at home, but there must have been a “mixed object” in the travelling between home and the private hospitals, because part of the object of the journeys must “inescapably” be to maintain a home in a separate location.

The journeys between the NHS hospitals and the private hospitals were also regarded as non-deductible by the panel on the grounds that “the object of the travel is to put the appellant into a position where he can carry on his business away from his place of employment; the travel is not an integral part of the business itself”.

Wholly and Exclusively for the purposes of trade

In recent cases there has been a wide ranging application of the definition of “wholly and exclusively for the purposes of trade”, which is the general test for deductibility of expenses.

Two recent examples of this are Mclaren Racing Ltd v HM Revenue & Customs and Interfish v HM Revenue & Customs.

In the case of Mclaren Racing Ltd, the fine relating to the spying of Ferrari amounting to £34m was deemed to be deductible by a first tier tribunal. This was because the act (which was fined) was wholly and exclusively for the purposes of trade and no laws were broken.

Whereas in the case of Interfish Ltd v HM Revenue & Customs the first tier tribunal deemed that sponsorship to a local rugby club was not incurred wholly and exclusively for the purpose of trade. This was because one of the reasons why the company sponsored Plymouth rugby club was to help the club to buy players, and therefore the sponsorship had a dual purpose.

These two cases could suggest to general taxpayers that there is a disparity between how the wholly and exclusively is applied on a case by case basis, although it should be noted that the points at question were quite different to each other.