Can your company get tax relief for punitive fees?

Can your company get tax relief for punitive fees?

​Our subscriber's company received an invoice for intervention fees following a site visit from the Health and Safety Executive (HSE). Can this cost be treated as a deductible expense for corporation tax purposes?

​Allowable costs

​Contrary to popular belief, not all expenses your company incurs in the course of trading are tax deductible. You'll be aware of the general tax rule that expenses are deductible where they are incurred "wholly and exclusively for the purpose" of its trade. However, some costs are excluded from deduction due to developments in case law or specific tax legislation, e.g. client entertaining.

​Context

​To determine the tax treatment of this expense we need to look to the context behind the payment. At first glance, HSE fees appear to be a charge for providing advice and support on health and safety issues. The fee for intervention can be substantial, as it is based on the time spent by HSE officers, with hourly rates of up to £322. This would imply that they are fees in exchange for a service and therefore deductible.

​However, health and safety intervention fees are only charged if there is a material breach of health and safety law. That is, if you comply with health and safety laws, or any breach is minor, you do not need to pay the HSE for its time. This means the fee represents a fine for breaking the law, which can have a different tax treatment.

​Fines and penalties

​There are no specific tax rules which prevent the deduction of a fine or penalty, but the expense must still meet the "wholly and exclusively" condition and not be contrary to any legal precedent which prevents deduction.

​Legal precedent

​The most important precedent appeared in McKnight v Sheppard 1999. The judges ruled that no deduction can be given for a fine or penalty because "its purpose is to punish the taxpayer" and allowing a tax deduction "dilutes" its effectiveness at cost to taxpayers in general. However, the ruling does not prevent a tax deduction for all fines and penalties.

​Wholly and exclusively?

​In the case of McLaren Racing Ltd v HMRC 2014 this rule was considered in the context of a fine levied by an international racing body because the company spied on its competitors to obtain information. The company might have been allowed a tax deduction but for the wholly and exclusively condition. The Upper Tribunal said that "the activities which gave rise to the penalty were not carried out in the course of McLaren's trade".

​HSE fees

​It could be argued that a health and safety intervention fee passes the wholly and exclusively test because it is incurred in the normal course of trading, but it fails to qualify for a tax deduction by reason of legal precedent, i.e. it would dilute the punitive intention of the fine at a cost to the taxpayer.

​Prevention is key

​Our subscriber is advised to engage a health and safety consultant to ensure there are no further breaches.

Tip: Costs incurred on preventive measures are tax deductible.

​An established legal precedent says fines should not be diluted or subsidised by the tax system. An HSE intervention fee is only charged when you've broken the law, and isn't tax deductible. Instead, invest in prevention measures, the costs of which will be deductible.