"There was a lot of tax at stake in this case, but with regulatory bodies and competition law authorities able to impose huge fines on businesses, the case could have had wider ramifications if McLaren had succeeded, so HMRC will be relieved to have won," said tax expert Catherine Robins of Pinsent Masons, the law firm behind Out-law.com.
In 2008 FIA, the Formula One motor racing governing body, imposed a £32m nfine on the McLaren racing team for breaches of its code of conduct (the ISC) as a result of obtaining and using confidential information belonging to a rival team. An employee of rival team Ferrari had passed confidential information about the design of Ferrari's cars to McLaren's chief car designer.
McLaren claimed a corporation tax deduction for the fine, which HM Revenue & Customs (HMRC) refused to allow. In order for expenditure to be deductible, McLaren had to show that the fine was incurred "wholly and exclusively for the purposes of its trade".
Upper Tribunal judges Mr Justice Warren and Greg Sinfield rejected the notion that "cheating" could be part of McLaren's trade. They said "a deliberate activity which is contrary to contractual obligations and the rules and regulations governing the conduct of the trade, which is not an unavoidable consequence of carrying on a trade and which could lead to the destruction of the trade is not an activity carried on in the course of that trade".
"The first tier tribunal decision was unexpected and so it is not surprising that the upper tribunal has overturned it. Most of the previous case law has denied deductions for fines – and the upper tribunal was clearly uncomfortable with the notion that McLaren should get a deduction for what it described as 'cheating'" said Catherine Robins.
In September 2012 the first tier tribunal had found in McLaren's favour, deciding that the fine was deductible as it was incurred as part of McLaren's trade on the basis that the conduct that led to the fine was "so closely associated with the mainstream of McLaren's trade" that Judge Hellier could not say it was not part of the trade, although he accepted that it was not a normal or ordinary activity of the trade. However, the FTT decision was not unanimous and tribunal member Nicholas Dee disagreed with Judge Charles Hellier's decision, saying that the fine was designed to punish McLaren and therefore could not be wholly and exclusively for the purposes of its trade.
McLaren had argued that the actions which led to the fine were actions of McLaren's employees and McLaren was vicariously liable for the actions of its employees and that liability arose in the course of McLaren's trade because it related to the actions of its employees. The Upper Tribunal disagreed and said that "it cannot be said that simply because an employer incurs liability as a result of the acts of an employee, the liability is incurred in the course of the employer's trade." The judges said "wrongfully obtaining and using confidential information belonging to a rival team, which McLaren accepts and the FTT held was not a normal or ordinary activity, does not become such an activity simply because it is carried out by an employee."
The judges accepted that the agreement that McLaren breached was entered into in furtherance of McLaren's trade and the fine had to be paid or McLaren would be excluded from the Formula One Championship. However, they said that the payment was not made solely to preserve McLaren's trade and had "at least as one if its purposes" the satisfaction of a legal obligation arising as a result of activities which were not in the course of McLaren's trade.
The Upper Tribunal judges said that even if they were wrong and the penalty was paid wholly and exclusively for the purposes of McLaren's trade, it would not be deductible because the fine was designed to punish McLaren for a breach of FIA's code.