Chapter BIM38520

Published date22 November 2013
Record NumberBIM38520

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009 (CTA 2009)

Penalty for infractions of the law are not allowable (further discussion)

As explained in BIM38515, penalties incurred for breaching the law are not allowable.

Another case concerning penalties under the Customs (War Powers) Act 1915 produced lengthier judicial commentary on the subject of finances and penalties. In the case of CIR v Alexander von Glehn & Co Ltd [1920] 12 TC 232, the company, which carried on trade as general produce merchants and exported goods to Russia and Scandinavia, had been sued for penalties under that Act in respect of alleged infringements of the Act in the course of its trade. The actions were settled by the payment by the company of a compromise penalty of £3,000 (without costs). The company incurred legal costs amounting to £1,074 in respect of the proceedings.

The company claimed a deduction for the penalty and its legal costs against its trading profits.The Special Commissioners decided that the mitigated penalty and costs were not admissible deductions in arriving at the profits of the company’s trade for Excess Profits Duty purposes (a tax which applied at the time to profits over and above a certain level).

Rowlatt J could not distinguish the facts from CIR v E C Warnes and Co Ltd [1919] 12 TC 227 (see BIM38515) and dismissed the appeal.

In the Court of Appeal, the Master of the Rolls, Lord Sterndale, examined whether it was important that the proceedings against the company were not technically criminal - saying that it did not matter. See pages 235-236:

`Now we had several authorities cited to us which seemed to establish that such proceedings as those are not technically criminal proceedings. I do not think that matters. They certainly are proceedings in which a penalty is being sued for by the Attorney-General as representing the Crown, for an infraction of the law, whether technically criminal for the purpose of appeal seems to me to be immaterial. The money which is paid is money paid as a penalty, and it does not matter in the least that the Attorney-General has elected to take treble the value of the goods, nor does it matter that it may be called in the Information a forfeiture. It is in fact, under the Section, a penalty.’

The Master of the Rolls then identified that the applicable legislation was what is now S54(1) CTA 2009. He went on to explain why the expenditure was not deductible, confessing in passing to some...

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