I don’t normally blog on corporation tax, but I couldn’t resist it. Just like everyone else, I seem to be a sucker for celebrity. So here goes.
In 2007 McLaren (they of the fast cars) got into trouble with the Federation Internationale de L’Automobile (the “FIA”). Apparently they 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. McLaren was contractually bound to follow this code and was fined £32 million and in addition suffered a reduction in its gross income of some £34 million.
It was the fine about which HMRC and McLaren disagreed. McLaren argued that since the penalty was incurred under contract and was incurred for the purposes of its trade that it should be treated as deductible for corporation tax purposes. Further, the activities which led to the penalty (i.e. the cheating) whilst not ordinary were “closely associated with mainstream of McLaren’s trade” and that it the incurred in the course of and wholly and exclusively for the purposes of the trade.
The arguments were long and technical and the two members of the tribunal making the decision disagreed. The member of the casting vote found in favour of McLaren.
The question will be where we go from here. Will this analysis be applied across the board to all fines incurred by sports people or organisations or indeed all penalties imposed in similar circumstances.
It seems unlikely (although other Formula One teams might consider having a go). There are a number of reasons for this.
- First, HMRC might appeal (there’s a lot of tax at stake and the judges in the case disagreed as to the proper analysis) although at the time of writing this blog they haven’t.
- Further, there is a body of law covering this subject already and HMRC are likely to try and distinguish the case on it’s facts.
- There are also technical reasons too. For example fines aren’t deductible if imposed on the person as opposed to the trade which may be the case for many sports related fines.
However, non-statutory fines occur in other contexts too, not just in the case of sports bodies and if you have recevied such a fine or penalty you need to carefully consider whether this case will apply to you.