One of the main criteria for deducting an expense in computing taxable profit of a trade is that the expense must be incurred ‘wholly and exclusively for the purposes of the trade’.
The courts have distinguished between ‘purpose’ (the object of the payer in making the payment) and ‘effect’ (the results that flow from making the payment). There may be an exclusively trade purpose despite the fact that the payment results in some consequential personal benefit to the payer. On the other hand, ‘some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made’.
Nowhere is the tension between trade purpose and private benefit more clearly evident than where a trader incurs costs in defending against a criminal charge. HMRC usually argues that there is ‘intrinsic duality’ in such expenditure: personal considerations (such as preserving one’s liberty, good name or both) cannot be separated from any trade purpose, so the expense is not incurred exclusively for the purposes of the trade and is non-deductible. But ultimately a taxpayer’s ‘purpose’ in incurring expenditure is a question of fact to be determined on appeal by the First-tier Tribunal (FTT).
Thus, in Duckmanton [2013] UKUT 305 (TCC), where a transport operator was charged with manslaughter following a traffic accident, the FTT’s conclusion that ‘it would defy common sense not to conclude that Mr Duckmanton’s main purpose in incurring significant expenditure on legal and other professional fees was to defend the manslaughter charge for the purpose of protecting his liberty and personal reputation’ led inevitably to HMRC’s winning the case.
In contrast, in Sheppard [1999] UKHL 6, the Special Commissioner accepted that the costs borne by a stockbroker in refuting allegations of malpractice were incurred exclusively for the purposes of his trade, despite the Commissioner’s having rejected the taxpayer’s assertion that ‘he did not care about his personal reputation’.
And so to the recent FTT case of Rogers [2021] UKFTT 458 (TC).
Here, a partnership ran a scrap metal business. Following an undercover police ‘sting’, two of the partners were charged with offences involving concealing, disguising or converting criminal property. Defence costs at first instance and appeal amounted to £600,000.
HMRC sought to present the case as one in which the protection of personal reputation and liberty was so fundamentally intertwined with acquittal as to make that at least one of the motives (albeit possibly an unconscious one) in incurring the expenditure. And in any event that ‘the trade could have been carried out even had criminal convictions stood, and so the defence of trade was possibly a weak reason to incur the costs’.
However, summarising the evidence adduced by the taxpayer, the FTT noted that: ‘Within 24 hours of the police operation, multiple important trading stakeholders were making it very clear to the partnership that this was being taken extremely seriously and that conviction would lead to the withdrawal of the lease, the insurance, the banking services and various licences, not to speak of customers/suppliers no longer dealing with them. We find that any defence of personal reputation was not a consideration when incurring the fees, although the consequence of the Court of Appeal judgment was that the personal reputation of Mr S Rogers may have improved slightly’. The taxpayer therefore won.
It’s worth noting that the taxpayer conducted his own case before the FTT (perhaps having spent £600,000 on his defence, cash was running short!). This might perhaps be thought a brave decision where so much tax was at stake; but sometimes this is not at all a bad strategy where what is before the tribunal is a pure question of fact. Certainly, it achieved the right outcome for Mr Rogers.
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Rogers: the deductibility of defence costs
When reputation matters.
One of the main criteria for deducting an expense in computing taxable profit of a trade is that the expense must be incurred ‘wholly and exclusively for the purposes of the trade’.
The courts have distinguished between ‘purpose’ (the object of the payer in making the payment) and ‘effect’ (the results that flow from making the payment). There may be an exclusively trade purpose despite the fact that the payment results in some consequential personal benefit to the payer. On the other hand, ‘some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made’.
Nowhere is the tension between trade purpose and private benefit more clearly evident than where a trader incurs costs in defending against a criminal charge. HMRC usually argues that there is ‘intrinsic duality’ in such expenditure: personal considerations (such as preserving one’s liberty, good name or both) cannot be separated from any trade purpose, so the expense is not incurred exclusively for the purposes of the trade and is non-deductible. But ultimately a taxpayer’s ‘purpose’ in incurring expenditure is a question of fact to be determined on appeal by the First-tier Tribunal (FTT).
Thus, in Duckmanton [2013] UKUT 305 (TCC), where a transport operator was charged with manslaughter following a traffic accident, the FTT’s conclusion that ‘it would defy common sense not to conclude that Mr Duckmanton’s main purpose in incurring significant expenditure on legal and other professional fees was to defend the manslaughter charge for the purpose of protecting his liberty and personal reputation’ led inevitably to HMRC’s winning the case.
In contrast, in Sheppard [1999] UKHL 6, the Special Commissioner accepted that the costs borne by a stockbroker in refuting allegations of malpractice were incurred exclusively for the purposes of his trade, despite the Commissioner’s having rejected the taxpayer’s assertion that ‘he did not care about his personal reputation’.
And so to the recent FTT case of Rogers [2021] UKFTT 458 (TC).
Here, a partnership ran a scrap metal business. Following an undercover police ‘sting’, two of the partners were charged with offences involving concealing, disguising or converting criminal property. Defence costs at first instance and appeal amounted to £600,000.
HMRC sought to present the case as one in which the protection of personal reputation and liberty was so fundamentally intertwined with acquittal as to make that at least one of the motives (albeit possibly an unconscious one) in incurring the expenditure. And in any event that ‘the trade could have been carried out even had criminal convictions stood, and so the defence of trade was possibly a weak reason to incur the costs’.
However, summarising the evidence adduced by the taxpayer, the FTT noted that: ‘Within 24 hours of the police operation, multiple important trading stakeholders were making it very clear to the partnership that this was being taken extremely seriously and that conviction would lead to the withdrawal of the lease, the insurance, the banking services and various licences, not to speak of customers/suppliers no longer dealing with them. We find that any defence of personal reputation was not a consideration when incurring the fees, although the consequence of the Court of Appeal judgment was that the personal reputation of Mr S Rogers may have improved slightly’. The taxpayer therefore won.
It’s worth noting that the taxpayer conducted his own case before the FTT (perhaps having spent £600,000 on his defence, cash was running short!). This might perhaps be thought a brave decision where so much tax was at stake; but sometimes this is not at all a bad strategy where what is before the tribunal is a pure question of fact. Certainly, it achieved the right outcome for Mr Rogers.
