In an appeal by HMRC against a decision of the First-tier Tribunal ("FTT"), the Upper Tribunal (Tax and Chancery Chamber) ("UT") decided that a penalty imposed on McLaren Racing Limited ("McLaren") in respect of a breach of the FIA’s non-statutory code was not deductible in calculating McLaren’s taxable profits for UK corporation tax purposes on the basis that it was not incurred wholly and exclusively for the purposes of McLaren’s trade. This decision is perhaps not wholly surprising; there is a line of cases in which courts have denied the deduction of a payment by way of damages, fines or penalties (albeit that this precise factual situation has not arisen). In any event this decision will be welcomed by HMRC, whose Director General of Business Tax, Jim Harra, stated, "We’re very pleased the Upper Tribunal agrees that the fine should not be given tax relief, which supports our view that most fines are not allowable as deductions against trading income."

McLaren’s chief designer had been passed detailed plans and information about Ferrari’s cars from a Ferrari employee and, following further investigation, it was determined that McLaren had thereby obtained some degree of sporting advantage. McLaren was fined approximately £32m and had all the points it had accumulated in 2007 withdrawn.

The FTT had determined (although not unanimously) that the penalty payable by McLaren was deductible for UK corporation tax purposes. On appeal, the UT held that the specific activity that had led to the imposition of the penalty was not carried out by McLaren in the course of its trade, despite the fact that it had been carried out by an employee of McLaren. McLaren’s argument that the payment of the penalty was necessary to preserve its trade (as non-payment would have resulted in its exclusion from competing in certain events in the future), was not accepted by the UT. This was not the sole purpose of the payment; it was also paid because McLaren had engaged in conduct that was clearly outside the course of its trade and had thereby incurred the liability to pay the penalty.

The fact that McLaren was required to pay the penalty in addition to losing all its accumulated points, together with the fact that the penalty was an alternative to McLaren’s exclusion from competing, meant that the purpose of the penalty was to punish McLaren. These facts precluded the availability of an allowable deduction for UK corporation tax purposes as the penalty could not be regarded as wholly and exclusively laid out or expended for the purposes of McLaren’s trade.

To view the decision in full, please click here.