Tax Relief For Victims of Fraud

Publication Date01 February 1997
Pages332-336
DOIhttps://doi.org/10.1108/eb025799
Date01 February 1997
AuthorDominic Gibbs
SubjectAccounting & finance
Journal of Financial Crime Vol. 4 No. 4 Trade
Tax Relief For Victims of Fraud
Dominic Gibbs
The consequences of a theft or fraud perpetrated
upon a business will invariably extend beyond any
immediate pecuniary loss. The attentions of
management, which would otherwise be engaged
in the day-to-day supervision of the business, arc
instead diverted on to such matters as the investi-
gation of the theft or fraud and the instigation of
appropriate remedial action. Costs are magnified
by the need to involve external professionals: legal
costs arising from an attempt to recover assets
from the wrongdoer, management consultants to
advise on improvements in reporting systems and
internal controls, and, where the theft or fraud has
been concealed within falsified or incomplete
accounting records, the engagement of forensic
accountants to establish the true financial position
of the business. The extent to which these, very
substantial, costs together with any loss arising
from the theft or fraud itself may be subsidised by
the Exchequer in the form of relief for taxation
purposes is, therefore, a topic of considerable prac-
tical relevance to the victims of theft or fraud.
GENERAL PRINCIPLES
The eligibility of the above expenses as deductions
against the profits of a business is determined not
by reference to any statutory provisions dealing
specifically with these matters but rather by refer-
ence to the general rules contained in ICTA1 1988
s. 74, which
inter alia
preclude relief for:
any disbursements or expenses not being
money wholly and exclusively laid out or
expended for the purposes of the trade, profes-
sion or vocation;2 or any loss not connected
with or arising out of the trade, profession or
vocation;3 and
any capital withdrawn from, or any sum
employed or intending to be employed as
capital in, such trade, profession or vocation.4
Mention should also be made of the provisions of
ICTA 1988 s. 577A, introduced with effect from
1993,
whereby payments (such as bribes) which
involve the commission of
a
crime are not deduct-
ible,
nor payments made as a result of blackmail.
WHOLLY AND EXCLUSIVELY FOR THE
PURPOSES OF THE TRADE
The classic example of this rule is Strong & Co. of
Romsey Ltd v Woodifield5 where a deduction was
refused in respect of monies paid by a tavern-
keeper to a customer by way of compensation on
account of injuries occasioned by dislodged
masonry. Per Lord Davey, the expenditure in-
curred had to be made for the purpose of earning
the profits of the business:6
'I think that the payment of these damages was
not money expended "for the purpose of the
trade". These words are used in other rules, and
Page 332

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