The FTT verdict is out!!
…no not that one, the one recently that found in favour of McLaren over HMRC, and which decided, apparently, provided you are under the jurisdiction of HMRC, that if the governing body of the sport you participate in fines you, it is tax deductible.
for a brief report.
(Below I mention some sportspeople and companies, and offer some discussion on a ruling. For clarity, I do not suggest that any person or company or party acts or acted with anything other than utmost integrity, and I do not suggest any wrongdoing other than what is already publicly known).
My understanding of this case is :
Past cases, I guess, will have made distinction between ‘commercial losses’ and ‘penalties imposed for breaches of the law’ that occur while a company is trading. So generally a number of types of business or commercial loss that eat into profit, or negate it, are deductible, but losses due to penalty for breaking the law aren’t.
But, when the company is involved in sport, the losses incurred due to breaking the law of that sport, rather than the law of the land, are deductible. It would seem that these losses are deemed as being under the heading ‘commercial losses’.
The taxpaying company argues that the fine imposed is set as a business cost that reduces profit. Just because this cost is a fine, that has come about due to what is judged as contravention of the rules of the sport participated in, does not affect the fact that it is still a business cost. It is still a cost “wholly laid out or expended for the purposes of the trade or profession”, (Income and Corporation Taxes Act 1988)(TA).
Without information on the HMRC argument, I assume they would have made the case that activities in contravention of the rules that govern their sport, are not the company’s usual business activities, or some such argument. I am happy to hear from contributors on this that have info or better guesses.
Judge Charles Hellier in his ruling said a number of things. The main points are below, with a few comments:
1. That the penalty is sufficiently “connected with the trade” of the business to come under the heading of commercial losses.
2. “In my view it is only if the nature of the penalty is to punish a person and if there is a serious public policy which would be diluted by deductibility that the penalty should not be regarded as an expense of the trade.”
[c31 – I think the use of the ‘and’ here is important. The penalty is to punish (is there any other kind of penalty? – ‘penal..’ being a big clue!) but the judge does not see a serious public policy dilution. I disagree with this and return to this later, with the help of one Immanuel Kant.]
3. The words of the TA did not contain references to the ‘normal’ or ‘ordinary’ trade, or to the ‘proper conduct’ of that trade, he said. Instead, these were “aids or glosses on the statutory words deriving from the attempts to explain why expenses might not be deductible”.
4. “In the case of a person whose trade or profession is based on trust and probity, a breach of those principles is a departure from the business he is engaged in because it strikes at the nature of that business: these words help in that context,” he said. “But their usefulness depends on the nature of the business.”
[c31 – to me the judge makes a call that in this case the commercial activity carried on by the company was “not limited” to acting within the confines of its commercial agreements (the laws/rules of the sport) …]
5. “Whilst I can understand that fraud or deceit might be found not to be part of a trade which depended on probity or trust, I can see no compelling reason for finding that McLaren’s trade was so limited,” he said. “I conclude that there is no reason of policy or law to limit the description of McLaren’s trade.”
[c31 – …and that the sport (by implication he means all sport, I think) is a trade or profession that does not have at its heart, “trust or probity”. So the judge holds that the ‘clients’ of the company in question, or the sport in question, or probably sport in general, does not require integrity (which I take probity to mean), and the continuing operation of the sport does not depend on trust and integrity. Also, my assumed HMRC argument seems to be countered here. The judge does not find that contravention of the sport’s governing body’s rules is necessarily undertaking activities that are not usual business activities. This is an important call – ruling that sporting activities of a commercial company can include compliance with and breaches of the rules of the governing body, and it is not expected by society to be otherwise. I have difficulty accepting this.]
Let’s consider the difference between a trade that may depend on probity or trust and one that doesn’t. Why, for example, would a lawyer, a building surveyor, or a consultant surgeon, operate in a trade that depends on integrity, but not a sporting company? I guess, looking at the customers of these trades compared with the customers of sporting companies, there is a difference in the actions that might be undertaken following from the service provided. A customer/client of a lawyer might undertake a costly court action based on opinion given, a customer of a surveyor might then invest life savings on the information provided on the value of a property, customer of a surgeon might undergo life risking surgery based on opinion given. With one risking reputation, one risking life savings, and one risking life itself, it can be clearly seen how important trust and probity are. Does the paying customer of a sporting company – thinking of spectators and fans – make such subsequent decisions and take subsequent risk? I guess not.
Whilst there is an obvious difference, and, in this aspect of the ruling I agree with the judge up to a point, I don’t agree that it is enough of a difference to make the call that integrity is not expected of sporting companies. It may not be required to the same extent, but integrity is at the heart of sport whether it be on the ‘field of play’ or in the boardroom. Again, thinking of spectators and fans, I’m sure everyone expects integrity of both participant competitors and of companies.
I could write pages and pages of analysis on this expectation of integrity and why it exists in sport, but since I don’t want to get ‘preachy’, will make do with a few sentences: IMO there is no point in calling it ‘sport’ if integrity is not at its heart. In whichever sport … the rules define the boundaries that make it the sport that it is. If ‘victory’ is achieved by means outside of the rules, then essentially it’s a victory in a different sport.
Let’s look at some examples or hypotheses. Snooker player Stephen Lee has made the news recently for allegedly ‘throwing’ a match. This is a World Professional Billiards and Snooker Association (WPBSA) investigation and should any fine be imposed, provided Mr Lee has his own company arranged to run his snooker affairs (I assume), and going by the judgement in the McLaren F1 case, it would be offsettable against tax. I’m quite sure integrity is expected of Mr Lee and all his compatriots in the game.
Presuming that football players have a similar arrangement, they would be able to offset any fines against tax whether imposed by their club for breach of discipline, or by the governing body, if my interpretation is correct. This, I suppose, puts a different slant on public perception of clubs disciplining unruly footballers by a fine of two weeks wages, for example. John Terry’s recent fine imposed by the English FA comes to mind (not that I make any claim to knowing anything of the tax affairs of John Terry). HMRC pays it, or put another way, the taxpayer (you and I) picks up the tab. Again, I’m very sure integrity is expected of these participants.
Similarly, were the SPL to fine a club for breach of one of its rules they could offset this fine against tax, if the McLaren case judgement is assumed applicable. Come to think of it, were the McLaren case assumed applicable with any fine imposed on Rangers Oldco from the findings and judgement of the current SPL Commission looking into ‘dual contracts’, they could offset it against tax – they could offset the ‘dual contract’ fine against the EBT liability! (on a presumption that both their FTT tribunal and ‘dual contracts’ decisions go against them). We know, based on the articles of association of the governing body, that utmost integrity is expected of these clubs.
As an aside, and playing a bit of mischief … might it not be the case that, should the SPL Commission fine Oldco a considerable sum, say, £9.4m per year of the ten years in breach of the rules, they would be able to offset £94m against tax for the period and would owe SPL a huge sum, but owe HMRC nothing?
Leaving those concerns and back to the case … given that its been decided that ‘trust or probity’ isn’t expected of sport, it’s crucial that the judge in this case would only disallow deductibility of such fines where serious public policy dilution might occur. Here’s where we enlist the help of Immanuel Kant. This chap Kant, briefly, was a German philosopher who ‘did his best work’ during the enlightenment at the end of the 18th century. Whilst this immense polymath spanned a number of subject areas and is considered a master of many, one of his well known writings was his first formulation on moral philosophy. This contains in essence the question of, when considering the morality of a course of action, what world/society would occur if everyone behaved in such a fashion. If this question is asked of the situation above – tax deductibility of sporting fines deemed as the entitlement of the company by the judge – where would we all be? Where would we all be if all companies who own/operate sporting institutions saw it as part and parcel of their activities to defy their governing body’s rules or laws, and were happy for any financial penalty to be tax deductible. And, society would not expect anything else!
All UK based sport would have no fear of fines since, by implication of the judgement, HMRC would pick up the tab. We would be in a situation where the sporting fine held no fear for competitor companies since they could offset the amount against tax. HMRC would, in effect pay the fines of all companies who’s business is sporting competition, so long as the fines are sporting fines. This, for me, constitutes a serious public policy dilution, if the policy of collecting tax revenue from sporting activities of companies that operate in the sectors is anything to go by. IMO, this represents serious wrongness.
HMRC have right to appeal. This FTT tribunal had a two member panel, with the other member disagreeing with Judge Charles Hellier, but the rules of it allow the one who is chair to have the casting vote. Immanuel and I will keep an eye out for this appeal.
Posted by Carl31