Businesses can treat fines as deductions

The world of Formula 1 is a rapidly evolving one, however whilst drivers may be awarded penalties for dangerous

driving, rarely is it that they get to go head to head with the taxman.  Financial engineering met elite engineering in the form of Formula 1 and HMRC. You may recall that the F1 McLaren team were fined a couple of seasons ago,(2007) for allegedly spying on their rivals Ferrari, in the hope of gaining a competitive advantage. The governing body (FIA) handed a pit-stopping £66m fine to the McLaren company which became £32m. Well it seems that McLaren are not simply in the business of setting fastest laps, pole positions or GP wins, but have now won a landmark case against HMRC, this is potentially a help to those firms that operate in industries where fines can be imposed. In essence this makes the case that businesses can treat fines as deductions. Frankly the one industry that comes to mind immediately for me is financial services – but also the sports world and perhaps media world.

A statutory penalty cannot be a deduction

McLaren have successfully argued that their fine, is not a statutory penalty, but one under the FIA rules. As a result this could be claimed as a business expense and therefore deductible. HMRC had argued that it wasn’t – on the grounds that a penalty violated someone else’s civil rights and therefore not deductible. The courts ruled in favour of McLaren. HMRC can still appeal (and may do so). So whilst being fined rarely carries good news, it would seem that in such circumstances, at least it can be described as a business expense and therefore used to reduce profit and associated tax. This may provide some comfort to a disappointing season for McLaren, who are currently third in the Constructors Championship with 4 races to go, but little chance of either Jenson Button or Lewis Hamilton winning the Drivers Championship this season.