Those with an interest in Formula 1 will remember that a little while ago some confidential documents relating to Ferrari were found in the possession of an employee of McLaren. The FIA decided that there had been some impropriety and imposed a substantial fine on McLaren of approximately £32 million. The question was of course whether this £32 million was an expense wholly and exclusively laid out for the purposes of the McLaren trade.
HMRC said it was not. They said that the penalty arose from conduct outside the trade. Legitimate gathering of information was part of the trade but illicit gathering of information was not. The penalty was for improper conduct of McLaren’s employees and a punishment for a serious breach of the rules.
The Tribunal did not feel that any of these things were not for the purposes of McLaren’s trade. They went so far as to say that the profit making activity carried on by McLaren was not limited to acting within the confines of its contractual agreements and could include cheating.
The penalty was a commercial penalty designed to affect McLaren in its commercial activity. It was not like a statutory penalty designed to be suffered by an individual. Furthermore, the penalty was not levied for the protection of the public but mainly for the regulation of a commercial activity. The penalty was something which arose from its trade, was connected with its trade and was incurred wholly and exclusively for the purposes of the trade.
The two Tribunal judges came to different conclusions and the dissenting view was that the payment was not laid out wholly and exclusively for the purposes of the trade and/or it was a loss not connected with or arising out of the trade. It was imposed because the conduct of McLaren fell way outside any normal and acceptable way of conducting their trade. Furthermore, if McLaren were seeking to preserve the whole structure of their profit making apparatus, it could be argued that the payment was capital. However, the dissenting view was overruled by the Chairman who had the casting vote and the £32 million was allowed.
Strong views have been expressed about this decision and instinctively it seems somehow wrong that conduct so wrongful and serious that it merited a £32 million fine should be entitled to a tax deduction. It is also perhaps a little extreme for Judge Hellier to suggest that fraud and deceit as well as cheating were part of McLaren’s trade.
However, I wonder whether the arguments here are distorted by the enormity of the figures and the particular circumstances. We are dealing here with a commercial contract between a number of substantial commercial bodies and the documents in possession of McLaren really only gave rise to impropriety because they were prohibited by the contract. If the contract had provided for a full disclosure of technical data between all Formula 1 teams, there would have been no issue. Accordingly, we are simply looking at one party to a commercial contract acting in breach of that contract and the other parties insisting on a particular sanction. The size should not matter.
Many commercial contracts contain penalty clauses, for example for failure to meet certain performance or delivery targets, and these are all in the nature of punishments for failing to meet the agreed terms – or otherwise to encourage prompt performance. A person is still carrying on his trade even if in the course of that trade he does not necessarily adhere to every term of every contract he has entered into. He does not cease to be trading just because, for example, he fails to deliver his product on time.
There is considerable authority for the proposition that a penalty for a breach of the law cannot be allowed as a matter of policy, but we are not dealing with that here. Although there are some surprising elements in this decision, the conclusion to allow relief for this payment would not seem to be in conflict with existing authority nor able to be dismissed on policy grounds.