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Chapter BIM38530

Document Cited authorities 2 Cited in Related
Vincent
Published date22 November 2013
Record NumberBIM38530

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

Civil damages stemming from day to day trading operations are allowable - but a penalty for breaching the law is not

The costs of civil damages arising as a result of normal trading operations are generally allowable. For example, you should allow damages awarded against a publication for libel. However, civil damages arising outside the normal course of the trade are not allowable.

In the case of Fairrie v Hall [1947] 28 TC 200, a sugar broker was a selling agent in London for Galban Lobo SA (a Cuban company). Mr Fairrie disagreed with the buying policy of the Ministry of Food as he believed it was adversely affecting the interests of Galban Lobo SA and himself. The deputy director of the Ministry of Food was Mr Rook, who was connected with a rival Cuban company, Cuban Trading Company of Havana.

In consequence of communications passing between Mr Fairrie and Galban Lobo SA concerning the disagreements, Mr Rook brought an action in the High Court against Mr Fairrie for libels contained in those communications.

The Courts held that Mr Fairrie had acted maliciously and awarded damages and costs against him amounting to some £3,500.

On appeal, Mr Fairrie contended that the expenditure was laid out wholly and exclusively for the purposes of his trade, or was a loss connected with or arising out of the trade. The Special Commissioners dismissed the appeal.

The High Court held that the Special Commissioners had reached the correct conclusion. The sums were not deductible.

Macnaghten J found that the expenditure was not allowable using the capacity test (see BIM37300). See page 206:

`In the present case the loss which the Appellant has sustained,£550 damages and £3,025 costs, is in one sense a loss connected with his trade. Apart from his...

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