Chapter BIM38522
| Published date | 22 November 2013 |
| Record Number | BIM38522 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009 (CTA 2009)
Generally, no deduction is allowable for a confiscation order, nor does a confiscation order cause any adjustment to the turnover of a business.
Confiscation is a legal process where a Court determines the benefit from a convicted person’s criminal conduct. See EHB261:004. It can be adjusted to take account of the available assets of the defendant. Confiscation orders are usually served on individuals. The main legal framework for confiscation is the Proceeds of Crime Act 2002, although some orders are sought using historical legislation such as the Criminal Justice Act 1988 or the Drug Trafficking Act 1994. However, these are only used in instances where the offence predates the introduction of POCA.
The case of R v Farquhar [2008] EWCA Crim 806 indicates that a confiscation order is ‘not about compensating the loser, but penalising the offender’. A confiscation order is penal and therefore no deduction is allowed for tax purposes under the principle established in McKnight v Sheppard [1999] 71TC419, where Lord Hoffman commented:
‘Its purpose is to punish the taxpayer and a court may easily conclude that the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purposes of tax.’
Where the amount of the confiscation order has been calculated with reference to the turnover of a business, it does not actually reduce the business’ turnover; it is merely calculated with reference to it. (It is worth noting that the illegality of an activity would not preclude profits from it from being taxable - see BIM22005 onwards) For example:
X runs a landfill site and has taxable profits of £10m and is taxed on that basis. X is subsequently convicted of exceeding permitted limits on tipping.
The turnover attributable to the excess tipping is calculated to be £1m and so the confiscation order served is for £1m.
The turnover is still £10m. The fact that £1m was obtained illegally is irrelevant as established in Mann v Nash [1932] 16 TC 523.
In summary:
- a confiscation order is penal and so cannot be allowed as a deduction against the profits of a trade;
- a confiscation order may be calculated with reference to illegally obtained turnover but does not alter the taxable profits of a trade.
If a company is named in the confiscation order then the same...
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