This month’s Chartered Accountants Tax Case Digest looks at a First Tier Tribunal (“FTT”) case which examined whether parking fines incurred by a company were an allowable deduction in computing profits to be charged to corporation tax.

In its decision, the FTT highlighted the long standing assertion that fines for breaking the law cannot be used to reduce a tax bill. It is the view of FTT that this case establishes a clear precedent for rejecting any future such claims.

Background

The case concerned an appeal which examined whether penalty charge notices (PCNs) incurred by a company while delivering consignments of cash were a business expense incurred for the purposes of trading and could therefore be used to reduce a company’s profits for corporation tax purposes.

The appeal concerned two items:

1. An appeal of two discovery assessments issued by HMRC in respect of the corporation tax computation for the accounting periods ending 31 December 2007 and 31 December 2008 for the sums of £158,170.20 and £157,711.28 plus interest; and
2. An appeal in respect of two closure notices issued by HMRC in respect of the company’s accounting periods ended 31 December 2009 and 31 December 2010. These closure notices amended the company’s corporation tax returns by £124,679.24 and £139,667.08 respectively.

At the time of the appeal, there were still open assessments for the accounting periods ended 31 December 2005 and 2006 and the accounting periods ended 31 December 2010 onwards. Therefore there were very significant sums of money at stake.

G4S Cash Solutions (“the company”) specialises in the secure transportation and storage of cash and valuables for businesses. The drivers working for this company were issued PCNs when dropping off cash consignments to clients. Approximately, 10,000 PCNs were issued per year in 2008, 2009 and 2010. Eighty per cent of these fines were down to four particular contraventions; parking or loading/unloading where restrictions are in force; stopping where prohibited on red route or clearway; stopping on a restricted bus stop or stand; and parking with one or more wheels on or over a footpath or any part of a road.

The grounds of the appeal by the company were as follows:

1. Payments made to settle the PCNs were made wholly and exclusively for the purpose of its trade, or alternatively they were a loss arising out of or connected to the trade;
2. In the particular circumstances of that trade, public policy does not dictate that a deduction in respect of those payments should be denied;
3. The company recognised the existence of case law principles stating that fines and penalties are not deductible but contended that this was an exceptional case and an exception to such principles should be made;
4. The company’s role in delivering cash and valuables was a social utility and could not be carried out safely without incurring parking infringements because of the need to be as close as possible to the point of delivery and the need to observe tight timeframes in light of the risk of a robbery occurring;
5. The company is socially responsible and did seek to avoid parking infringements where possible and such infringements only occurred where the safety of employees and general public would otherwise be compromised;
6. The company does not take a tax deduction for PCNs where parking infringements occur unnecessarily;
7. Parking infringements are a civil matter not a criminal matter.

The HMRC position was as follows:

1. Sums expended on paying PCNs are not deductible for corporation tax purposes because they are statutory fines imposed on the company for a breach of law by the drivers and not for actions in the course of the company’s trade. HMRC did concede that PCN’s were connected with the trade, in the sense that the offences for which they were issued were committed whilst carrying out the trade. However, the fines were imposed because of the wrongful acts of the company’s employees in terms of parking. Therefore the payment of the PCNs is not a commercial loss arising out of the trade, but out of the breach of relevant parking statutes.
2. The PCNs arose because the company’s vehicles parked in a prohibited place or manner and therefore the PCNs were issued and become payable under statute. In the current legislation, such expenses are not deductible for tax purposes.
3. Tax law and practice in the UK for the last 100 years states that a fine imposed by statute for a breach of law is non-tax deductible notwithstanding the lack of moral obliquity or social utility of the business or public policy.
4. The public policy underpinning the non-deductibility of fines and penalties is on the basis that permitting these deductions would dilute the legislative policy under which the fines and penalties are imposed. Such fines are imposed with the intention of punishing the owner or driver of the vehicle for parking illegally and as a deterrent against such behaviour.

Decision

The company’s lawyer said that there was no black or white in this matter and the FTT judge agreed by stating in his view, the palette is many shades of muted grey.

The FTT stated that there was no doubt that PCNs are a civil matter but they are imposed in terms of statute and the civil enforcement of parking offences does not alter this. They accepted that such fines are a real cost to a business but that does not make them tax deductible. Furthermore whether or not PCNs should be imposed is not a matter for the FTT to consider; the company can appeal that decision to the relevant authority.

The FTT held that the fines were not paid for the purpose of earning profits; rather they were unfortunate incidents which followed after the profits had been earned.

While the FTT agreed that cash transportation is an essential part of modern economic life and the aim of any company is to ensure the secure transportation of cash minimising the risk of robbery and ensuring the safety of employees and the general public, it did not accept that the company had a unique role because it holds a significant share of the market. This dominance should not entitle the company to a separate tax treatment. It cannot be the only company in the UK to be allowed to deducted fines incurred for breach of the law. This would be inequitable. Furthermore, a number of PCNs were incurred because the company does not wish to lose to its competitors. This is a commercial and strategic decision of the company and the consequential PCNs are inevitable where it chooses to breach parking restrictions in order to maximise profit.

The company stated that certain PCNs arose because the company did not want to breach service contracts with its customers by rescheduling a delivery and was therefore forced to incur parking fines in some instances. This indicates another commercially driven decision. While the underlying factors of paying the PCN relate to the trade, the company could have rescheduled the delivery or renegotiated with the customer. The FTT did not accept the argument that the trade could not be conducted without incurring PCNs solely caused by safety imperatives and therefore the PCNs arise out of the trade itself. The FTT felt that the company had an opportunity to minimise the exposure to PCNs in a number of ways to make the PCNs avoidable.

The FTT also pointed out that after the periods under discussion, the company had in fact invested in a major training exercise to reduce the number of PCNs incurred. This exercise involved retraining drivers, the reappraisal of customer locations and parking options as well as an amendment of company processes. Six months following this exercise, the company recorded a fifty per cent reduction in the number of fines received. This would suggest, in the opinion of the FTT, that the PCNs were not a necessary result of having to operate in a certain way in order to ensure the safety of employees and the public as the company had sought to argue.

The FTT furthermore did not find that the company only claimed deductions for PCNs which were unavoidable because of a safety imperative.

In conclusion, the FTT stated that the cost of a PCN is paid in connection with the trade but the key words of the legislation are “wholly and exclusively for … the trade”. This rule is only satisfied if the taxpayer’s sole purpose for incurring the expense is for the purpose of the trade. If there is a non-trade purpose then the expenditure is not allowable even if there is some commercial benefit in making the expenditure. The company’s trade in this case is not that of breaking the law. The breach of law is a deliberate activity which is for commercial gain and arises as a result of activity in the course of the trade but it is no more part of the company’s trade than any other similar activity. The payment for PCNs was not money wholly and exclusively expended for the purpose of the company’s trade nor was it a loss connected with the trade.

As a result it is the view of the FTT that the payment for PCN was not an allowable deduction for computing the profits to be charged to corporation tax. The FTT dismissed the appeal.

The full judgment in this case is available from

http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j8997/TC05015.pdf