Appeal allowed in McLaren Racing Limited £32 million “Spygate” penalty case

The Upper Tribunal has allowed HMRC’s appeal against the widely reported Decision of the First-tier Tribunal (Tax Chamber) in McLaren Racing Limited v HMRC. The First-tier Tribunal held that the Formula One racing team was able, for the purposes of calculating its corporation tax profits, to deduct as a business expense a fine of £32 million imposed by the Federation Internationale de L'Automobile as a result of the "Spygate" affair involving the misuse of Ferrari's confidential information.

In overturning the First-tier Tribunal, the Upper Tribunal held that wrongfully obtaining and using Ferrari’s confidential information was not “in the course of” McLaren’s trade and was not wholly and exclusively expended for the purposes of the trade; it was therefore not an allowable deduction.  The Upper Tribunal also held that there was a rule of public policy which applied to prevent deduction because the fine had been imposed to punish McLaren for its conduct.  This was the first case to consider the scope and application of public policy to the deductibility of fines and expenses since the leading case of McKnight v Sheppard in 1996.

The Upper Tribunal’s Decision will have a broad application to the deductibility of all non-statutory fines, especially those imposed by an industry regulator, and is of direct relevance in the sporting context given the Upper Tribunal’s observations on cheating in sport and the public interest in ensuring fairness of competition.  It is very likely that fines imposed for match fixing or doping (examples given by the Upper Tribunal) would be treated in the same manner.

Akash Nawbatt and Christopher Stone appeared for HMRC.

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