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July 3, 2014

McLaren's Corporation Tax Relief Pitted – McLaren v HMRC, 2014 UKUT 0269 (TCC)

Back Ground

Under Formula 1's Concorde Agreement, McLaren Racing Ltd must agree year on year to meet the F1 governing body’s (FIA) Sporting Regulations.

During the 2007 season McLaren failed to do this and the FIA levied a fine on the company of £32.3milion.

The fine was computed as a penalty of $100m less the income that McLaren had already lost because of the championship points that were also deducted because of their behaviour.

McLaren made a claim to include the fine as a deduction against its profits for corporation tax purposes.  HMRC challenged the availability of a deduction.

Court History

The case had first been heard in the First Tier Tribunal in 2012.  In this hearing, Judge Hellier decided that McLaren were contractually obliged to pay the penalty under agreements that it had entered into for the purposes of its trade and therefore it was an allowable trading expense for corporation tax purposes.

HMRC appealed this decision.

The Upper Tribunal Decision in 2014

In the appeal hearing the Judge considered a number of past cases where claims for corporation tax deductions re damages, fines and penalties had been considered.

However, in the end the decision revolved around a review of the statute in ICTA S74, (as in force at the time), which in turn boiled down to the question of “was the penalty paid wholly and exclusively for the purposes of McLaren’s trade?

McLaren’s trade was held as being ‘trying to make money from the design and racing of Formula One cars’.

The Court decided that deliberate activity which is contrary to contractual obligations and the rules and regulations governing the conduct of the trade (cheating) and which is not an unavoidable consequence of carrying on a trade is not an activity carried on in the course of that trade.

At least one of the purposes of the fine was the satisfaction of a legal obligation arising as a result of activities which are not in the course of McLaren’s trade (cheating).  Therefore the payment of the fine was not wholly and exclusively for McLaren’s trade.

As a result the Upper Tribunal upheld HMRC’s appeal and the fine was held not to be a corporation tax deductible trading expense.

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