McLaren claimed that the fine it received for using confidential Ferrari information was deductible in relation to its UK tax liability. Although McLaren succeeded in the lower court, a senior court has now rejected the claim on the basis that McLaren's trade does not extend to cheating, and that there is no reason why the rest of the community should share the burden of McLaren's fine.
In the 2007 motor racing "Spygate" controversy, Formula One giant McLaren was found to have wrongfully obtained and used confidential information from rival Formula One team, Ferrari, through one of Ferrari's ex-employees. In another hearing, Renault was found to have obtained confidential information belonging to McLaren. The regulatory body for motor-racing, the FIA, imposed a fine of GBP32 million on McLaren because it had obtained and used the confidential information to obtain a sporting advantage. McLaren claimed that the GBP32 million penalty was tax deductible, which the Revenue contested.
In order to be deductible for UK tax purposes, the penalty had to be an expense that was wholly and exclusively incurred for the purposes of McLaren's trade, or a loss connected or arising out of its trade.
The First Tier Tribunal (FTT) found (in a majority decision) that the fine was deductible on the basis that McLaren's trade was making money from designing and racing cars. It was in pursuit of this objective that McLaren obtained the information. In particular, the FTT relied on four aspects of the Formula One racing business to show that what it had done to warrant the fine was wholly and exclusive incurred for the purposes of McLaren's trade:
- It was an ordinary part of all of the Formula One teams' trade to seek information on their competitors' designs and strategy.
- It was permissible to employ ex-employees of other teams, as McLaren had done.
- Renault had acted in the same way as McLaren.
- McLaren had obtained a sporting advantage, which was its aim in order to make money from racing cars.
The FTT also found that there was no policy reason to reject McLaren's claim because the fine was designed to affect McLaren's trade as a Formula One team, and was just part of a private commercial arrangement, rather than, for instance, a fine imposed by a statutory regulatory body.
The Upper Tribunal (UT) rejected the FTT's approach, on the basis that by signing up to the rules imposed by the FIA on Formula One teams, McLaren's trade had to be limited by reference to those rules. The UT completely rejected each of the points relied on by the FTT to find that the fine was not incurred wholly and exclusively for the purpose of, or even in connection or arising from, McLaren's trade:
- It was not an ordinary part of the Formula One teams' activities to wrongfully obtain their competitors' confidential information.
- Although employing other teams' ex-employees was permitted, it was not permitted to use information wrongfully disclosed by those ex-employees.
- Saying "they were all at it" does not justify breach of the rules by any of the teams.
- McLaren only obtained a sporting advantage to the extent that it was not found out, as otherwise it was liable to, and as it indeed did, lose its points and suffer a penalty.
The UT also held that as the fine was imposed in order to punish McLaren, there was no reason why the rest of the community should share its burden.
This decision provides clarity in relation to the deductibility of fines. Although it may seem odd that rules and penalties imposed by a non-governmental and non-statutory body should affect a taxpayer's tax treatment, it also recognises that as a matter of practice, in many areas which require some kind of regulation, a private body will be responsible for enforcement.