Upper Tribunal rules McLaren’s £32 million penalty not tax deductible

Upper Tribunal rules McLaren’s £32 million penalty not tax deductible

Mon 30 Jun 2014

McLaren Racing Ltd is a well known Formula One racing team.  As such, it had agreed to be bound by certain sporting regulations laid down by the Federation Internationale de l’Automobile (FIA).  Penalties could be imposed for breaches of the FIA’s International Sporting Code (ISC) by the World Motor Sports Council (WMSC).  McLaren breached the code by having obtained secret information about designs of Ferrari’s cars, which gave it a sporting advantage.  As a result McLaren was fined approximately £32 million (being $100 million adjusted for lost revenues of $36 million resulting from McLaren’s loss of points). 

Whether McLaren could deduct the £32 million penalty for tax purposes depended on whether the penalty was covered by the general rules as to deductions not allowable as set out in s74(1)(a) or (e) ICTA 1988.

These are:

(a)    any disbursements or expenses not being  money  wholly and exclusively laid out or expended for the purposes of the trade

(e ) any loss not connected with or arising out of the trade.

McLaren were bound to pay the penalty as failure to do so would have resulted in their exclusion from Formula One.  The UTT decided that the nature of the penalty meant it should be considered for deduction as a disbursement or expense.  However, before doing so, it was necessary to decide whether McLaren’s trade included cheating.  The WMSC decisions showed that deliberately acting outside the rules was not acceptable behaviour.  The UTT expressed the view that whilst it was undoubtedly part of McLaren’s trade to seek information about competitors,  that did not support the conclusion that the deliberate flouting of the rules should be seen as an activity in the course of the trade.  Furthermore, the improper use of information by former employees of a competitor could not be regarded as activity ‘in the course of the trade’. Neither did the fact that Renault had also obtained confidential competitor information in any way legitimise McLaren’s actions.

The UTT states at paragraph 60 that ‘a deliberate activity which is contrary to contractual obligations and the rules and regulations governing he conduct of the trade, which is not an unavoidable consequence of carrying on a trade and which could lead to the destruction of the trade is not an activity carried on in the course of that trade.’  Further, that the payment of the penalty was not only to avoid exclusion from the World Championship; it was also paid because it had engaged in conduct that was not in the course of its trade.

In conclusion the UTT found that ‘deductibility of the penalty cannot therefore be justified as an expense of carrying out an activity in the course of the trade.  The penalty is not deductible on the basis that its payment was necessary to preserve McLaren’s trade since that was not its sole purpose.  Accordingly, the penalty was not laid out wholly and exclusively for the purposes of McLaren’s trade and was not an allowable deduction for tax.  Even if the sole purpose of the payment had been to preserve McLaren’s trade, it would still not satisfy the statutory requirement because the nature of the payment was such as to prevent its deductibility, namely that it was designed to punish McLaren for an egregious breach of the ISC.’


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