Only expenses that are incurred wholly and exclusively for the purposes of trade can be deducted from a business's tax liabilities. That threshold is, to say the least, a demanding one but, as a First-tier Tribunal (FTT) ruling showed, it is not insurmountable.
The case concerned a partnership that ran a long-established scrapyard. Following a police 'sting' operation, in which undercover officers attempted to sell purportedly stolen property to the scrapyard, one of the partners was found guilty of attempting to conceal, disguise or convert criminal property. He was, however, subsequently exonerated when his conviction was overturned by the Court of Appeal.
The legal costs run up by the partnership in successfully defending the partner and a colleague, who was acquitted, came to over £600,000. The partnership argued that those costs were deductible for tax purposes in that that they had been incurred solely for the purposes of its trade. HM Revenue and Customs took a contrary view, however, and the expenses were disallowed.
Upholding the partnership's challenge to that decision, the FTT accepted that, had the partner's conviction stood, it would probably have been put out of business. The likelihood was that its various operating licences would have been revoked. Its lease of its trading premises, its banking facilities and its trading relationships would also have been placed in jeopardy.
The expenses had been incurred to protect the partner's professional, rather than personal, reputation. They had also not been incurred to protect his personal liberty in that there had never been any real prospect of him being sent to prison. The FTT was satisfied that the expenses were wholly and exclusively incurred for the purposes of the partnership's trade and were therefore tax deductible.