McLaren wins spying scandal tax verdict

The McLaren Formula One team has been able to claim that a £32m penalty for spying on rival Ferrari was tax deductible.

The Woking-based group successfully argued at a tax tribunal [McLaren  Racing Ltd v Revenue & Customs UKFTT 601] that the 2007 fine handed down by governing body FIA was essentially a business expense.

Judge Charles Hellier’s casting vote ruled it was “wholly and exclusively” incurred for the purposes of its trade, quashing HMRC’s argument that a penalty penalising activity that violated someone else’s civil rights should not be considered such.

Julian Hedley from Saffery Champness said on the Today programme that it was an unusual decision, but that “It was a commercial penalty designed to affect McLaren and its commercial activities and trade.

“It was decided on the basis that it wasn’t a statutory fine if you like for breaking the law, but was actually a penalty that was incurred under the rules governing McLaren’s participation in F1,” he said.

Continued...

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Comments

Interesting result    1 thanks

vince8 | | Permalink

and a nice fee for winning!!

Paul Scholes's picture

Another sign of our times    3 thanks

Paul Scholes | | Permalink

A high profile company, acting unethically, and we are expected to pay towards the fine.  They should add that to their CSR policy statement.  Yes, they actually have one, I couldn't believe it either.

Err...    1 thanks

markfd | | Permalink

...you're not paying anything.  They can claim relief just as a business can eg if it loses an industrial tribunal or any commercial court case.

Paul Scholes's picture

@markfd    6 thanks

Paul Scholes | | Permalink

By giving (or being forced to give) tax relief on the payment the government has effectively financed 30% of the fine and, because the government doesn't actually produce its own income, other taxpayers ie "we" end up footing the bill.

It may "only" be £9M but, as the article points out, this is unlikely to be restricted to F1 besides which, it raises questions of principle.

It is not the legal principle I'm hacked off about, that makes perfect sense for "business" expenditure, it's in the business ethics (or lack of them) that gives a company justification for claiming the cost of unethical behaviour against taxable profits.

In their Corporate Social Responsibility policy statement they start by saying: "The McLaren Group is committed to the elevation of CSR values among its staff, customers and stakeholders".

Companies either see such statements in terms of marketing "that'll make us look great" or as describing what's in their DNA. In McLaren's case it appears they pick & chose the bits of their industry to which they apply ethical behaviour.  Call me cynical but I see no mention of directors or management in the above quote.

 

The business ethics debate has been ignited recently with banks, financial institutions and other elements of our society who exert power and influence and, in using the heading I did above, I was indicating that this is just another example of how grubby things have become.

 

Fortunately there are individuals and organisations about that "get it" and who would have told their accountants to add back the expenditure in their comps.

 

I hope that explains my opinion more clearly, it was late & I was hacked off when I posted last night.

It's still not your money

markfd | | Permalink

It's set against the enormous income they've generated in the UK by their efforts, ingenuity and investment over many years, not to mention the employment generated.

ShirleyM's picture

It still affects the tax take    4 thanks

ShirleyM | | Permalink

The profits are not 'our' money, as with the penalties, but they affect the tax collected.

I agree with Paul, but for me, the tax collected is a side issue, as the country is becoming a place where poor and non-existent ethics and social conscience is seen as the norm and is now seen by the majority as being perfectly acceptable!

It reminds me of Maggie's days where 'greed is good'. It doesn't seem to matter how you satisfy the greed, and how many dirty tactics are used to 'win'.

'Grubby' is a very good description indeed!

Paul Scholes's picture

@markfd    4 thanks

Paul Scholes | | Permalink

So what you're saying is we should give organisations a volume discount on their tax bills?  Again, if that was applied across the board, then those of us who don't make the grade, end up supplementing the cost.

As the text doesn't convince, I'll use maths.  The government needs £Xbn to run the country but by having to cover say £200bn in doubtful claims like this, aggressive tax avoidance and your volume discounts, it is £200bn short of £Xbn, it has to increase taxes by £200bn.

The fact that McLaren will pay lots of tax to make the £9M insignificant (to it) doesn't make it right.

From a purely personal point of view I'd have no difficulty paying a lot more tax if Industries like tobacco, motor racing and armaments were forced out of business or overseas, but whilst they are legal and socially acceptable as bona fide businesses, and not a waste of resources or damaging to health, they should pay the right amount of tax.

 

Could the both of you be any more patronising?    1 thanks

markfd | | Permalink

I mean gosh I never realised that if MacLaren paid less tax that meant the government would have less money.

The point is, in your world, if a business lost a commercial court case it would then have to apply to a panel of self-appointed apparatchiks who would decide if they were morally allowed to claim relief for their expense.  Or in fact if they conducted a business the self same apparatchiks disapproved of, presumably to deduct any expenses at all.

In my view this whole philosophy of it's our money and we'll let you know how much of your earnings we'll deign to let you keep is far more objectionable that what you are complaining about.

And please, blah blah blah Maggie blah blah blah ... pathetic.

ShirleyM's picture

lol ... so you think cheating and breaking the rules    4 thanks

ShirleyM | | Permalink

... and then getting a hefty penalty from their ruling body should be a valid business expense.

OK - you are entitled to your opinion, as am I.

ps. Am I allowed to mention Tony Blair, or David Cameron?

Paul Scholes's picture

Can we keep this polite/adult please?    3 thanks

Paul Scholes | | Permalink

Mark - I apologise if I came across as patronising, your comments were extremely short and I have no idea of your background, but it seemed that you were just not appreciating that if the government had to find extra revenue to pay for this, or any other, tax relief, it would have to come to everyone else (ie "we") to collect it. 

If you read my opinions again, you will see that I make no suggestion about "after the event" judgment panels, I agree this would clearly be unworkable and very silly. 

My (and Shirley's) main complaint is that a regulatory body has already decided on the ethics of the activity and it is plain wrong to then expect to be subsidised out of the public purse when it comes to paying the fine, and a company with any sort of ethical grounding should recognise this and take the appropriate action by not claiming it.

Instead, with this and the other financial ills we've experienced, the government is now forced to consider new complex tax law to combat the behaviour.

 

 

this will go further    3 thanks

asking | | Permalink

It was an incorrect result imo and doesnt pass my 'sniff' test!

I am sure Ferrari could have sued Mclaren through a criminal court and been awarded damages. That wouldnt have been allowable, so why should a fine be allowed which is imposed outside of the legal system to avoid further protracted proceedings (ie self regulating).

It will just cost them another few hundred thousand pounds in legal fees before they eventually have to pay the tax.

The decision will eventually be overturned. I dont think anything else needs to be said. 

What seems to be even more    2 thanks

bhimal | | Permalink

What seems to be even more immoral unless i am mistaken, according to the 2010 finacial statements on a profit of £14m Mclaren Racing Limited didn't pay any tax anyway!

Trade associations    1 thanks

tim hervey | | Permalink

I seem to recall that if the business were a member of a trade association and that trade association imposed a penalty/fine under its rules on the business, then the business could only get tax relief on that penalty/fine if the trade association was taxable on the receipt of that penalty/fine income.

Is the FIA and McLaren sitiuation not the same or similar enough?

Holier than thou

ic1963 | | Permalink

Is this really a case of corporate greed or the just application of tax law? Mcclaren has frequently brought pride to the Union Flag and the underlying punishment relates to the act of a rogue employee or employees rather than corporate wide cheating. The people who will really pay for this will be the sovereign funds that buy British debt to cover the excess of our expenditure over our income. Poor them!

FI? Ethics?

vstrad | | Permalink

I'm afraid Paul's and Shirley's introduction of an ethical element into this discussion is rather misplaced. If they feel competent to question McLaren's ethics they must also consider how ethical is the F1 organisation that fined them. There is a widespread conviction amongst F1 fans that the application of "the rules" invariably favours Ferrari at the expense of other teams. And wasn't there a big court case in Germany recently concerning corruption in F1 where a Mr B Ecclestone had to admit to having been coerced into handing over $44M to a dubious business partner?

"The German banker at the centre of a multi-million pound corruption trial involving Formula One was sentenced yesterday to eight and a half years in jail as speculation turned to whether Munich’s state prosecutor might now charge the sport’s executive Bernie Ecclestone."

(See http://www.telegraph.co.uk/sport/motorsport/formulaone/9361232/Attention-turns-to-Bernie-Ecclestone-after-German-banker-is-jailed-in-Formula-One-corruption-case.html )

 

Paul Scholes's picture

Is cheating not unethical?    2 thanks

Paul Scholes | | Permalink

@vstrad Think you've missed a key stage in this, Shirley & I did not introduce an ethical element into this discussion, we didn't need to, it was already there. McLaren were caught and admitted cheating, so whatever I/Shirley or anyone outside the Motorsport industry think of the rules is irrelevant, they cheated.

On the assumption that most people will see cheating as unethical/immoral my view is that the act is compounded by then expecting others to suffer financially for it and, yes, at that stage, I feel competent to hold that view, I trust my nose.

I don't follow Motorsport and so I don't possess your competency to judge F1's actions but, with respect, McLaren sign up to F1's rules and, as I say, admitted they broke them and so F1's ethics are not really part of this discussion.

I'm talked out on this one now, besides which I recognise it's time to leave any discussion when I see words like "brought pride to the Union Flag" used to justify/excuse cheating, I remember all those Stars & Stipes fluttering over the Champs-Elysees and the people who come second (or in silver medal position) who are denied genuine fame & fortune.

 

Food for thought.......

The Innkeeper | | Permalink

Would this mean that fines and penalties handed down by professional bodies etc be deductible? I appreciate that this is a First Tier decision so is not binding.

McKnight v Sheppard anyone?

Chris Wise | | Permalink

 

Surely this case is the definitive on whether professional body sanctions are allowable? fines not allowable associated costs allowable, or have I missed something in my bid to avoid motorsport?

Some sympathy

asillahi | | Permalink

While I have a fair bit of sympathy with Paul's view I think to group motor racing with the tobacco and armaments industries is probably stretching things to a level that I had never thought of.

Paul Scholes's picture

Well I'm glad I opened the box

Paul Scholes | | Permalink

asillahi - I deliberately stated it was a personal opinion.  I see absolutely no point in racing a fossil fueled lump of metal and plastic around a racetrack, where herds of followers, kit & a support industry attend, presumably using huge quantities of energy and resources in the effort.  I'm also at a loss to understand why it's called a sport and, thankfully the Olympic authorites seem to agree?

I will concede though that it probably comes just after tobacco but only because that's where a great deal of the funding comes from.

 

Crikey Paul

asillahi | | Permalink

You forgot to mention carbon fibre which you'll be please to know consumes even greater quantities of our scarce resources. Every sport, even those you may follow will have it's followers although I agree, the vast circus that is F1 is too gross even for me, much as I love all things 4 wheeled. I'm not sure F1 wld be interested in the Olympics as they don't represent the pinnacle of every sport.

My comment was based on the fact that 2 of the industries you mention have death at the core of their business whereas motor sport doesn't, not since the sixties anyway. Anyone seen that F1 documentary on TV, apparently there was a greater chance of dying than living. Anyway, perhaps we transgress. Happy opinions all.

Paul Scholes's picture

OK asillahi I admit....

Paul Scholes | | Permalink

it was a bit OTT I should have also mentioned some other wasteful industries to balance it up a bit it's just that they are all at the top of my "do away with I'll pay my bit of the tax lost" list.  Wonder if EasyJet and X Factor would count?

Well I never...

penpusher | | Permalink

thought that I would actually agree with a Revenue decision.  Spying on another business, corporate espionage a tax deductible expense!  This just proves the notion that big businesses get that way because they can afford the best lawyers and run 'circuits' round our poor Revenue bods.  At least its good news for James Bond and his ilk, "Martini, shaken, not stirred, it's OK it's tax deductible", what a shambles.

thisistibi's picture

Late to the party but...

thisistibi | | Permalink

I am amazed that AWeb members can discuss the tax deductibility of this fine without considering whether it was incurred "wholly and exclusively".  Surely that is the crux of the matter?

If anyone here takes the view that the court's decision was incorrect, then they presumably view that the cost was not wholly & exclusively incurred for the purposes of the trade.  In that case, can I ask what exactly was the purpose of the fine?  Especially bearing in mind that if McLaren refused to pay the fine, they would be in breach of contract with the FIA and no doubt thrown out of Formula 1.  

I would actually take the point further and say that statutory fines are also incurred wholly & exclusively incurred for the purposes of a trade, and by law should be deductible.  The court decision from 1920 which gives authority to non-deductibility of statutory fines (CIR v Alexander von Glehn Ltd) is the incorrect court decision here - a very sloppy decision which caused confusion in the first place.  If the UK Government intended for fines to be non-deductible, then they should have legislated for it.

I think fines shld be dissallowed

asillahi | | Permalink

thisistibi-I suppose we were letting off steam rather than thinking technically. There are many ways we can save on tax but the discussion these days seems to be around what is morally acceptable and that's where much of this discussion comes from.

Personally I think fines shld not be an allowed as a deduction for tax. Why shld the tax payer suffer as a result of another's inability to carry out their business in a legal and efficient way?

Paul Scholes's picture

Yes thisistibi things have moved on a bit    1 thanks

Paul Scholes | | Permalink

I repeat:

"It is not the legal principle I'm hacked off about, that makes perfect sense for "business" expenditure, it's in the business ethics (or lack of them) that gives a company justification for claiming the cost of unethical behaviour against taxable profits "

This has expanded with the recent PCA grilling of the semi-seniors from Starbucks et al and I hope the government keep the heat turned up on this topic and change legislation to stop companies and individuals from gaining financial compensation, from the rest of us, for unethical behaviour.

"It's legal so it's OK" has never been a safe position to hold, if it was we'd never need to change or create new laws.

As an aside, I see McLaren has taken the plunge into electric cars. Laugh?  I nearly did my own tax return. I'm being judgmental but, no matter what they say, this will be a business rather than ethical/environmental decision.

thisistibi's picture

Ethics

thisistibi | | Permalink

I don't think it would be very ethical for McLaren to be required to pay tax on £32 million of income which they never received.  The basis of all tax should be that the cash has been generated in order to pay the tax....

ShirleyM's picture

Ethics

ShirleyM | | Permalink

I agree with Paul.

Being legal does not excuse dodgy, or unethical, practices. It is impossible for anyone to foresee the many ways of 'legally' avoiding tax that are employed, so laws are usually created after the event. This means the early avoiders get away with it, and the taxpayer picks up the tab for the lost tax, the cost of changing the law, and then everyone has to suffer (wade through) even more laws that become increasingly complex.

There are fines and fines ...

vstrad | | Permalink

I would absolutely agree that fines imposed by courts of law should not be tax-deductible. However, the FIA is not a court, it is more like a club. It's "fines" have no more moral or legal authority than a fine imposed by your local golf club for alleged cheating in the monthly medal. If one wishes to remain a member, one pays the fine, it's as simple as that.

Paul Scholes's picture

@vstrad

Paul Scholes | | Permalink

OK but how would you feel if the golf club member paid the fine then turned to the local community (including you) to pay a third of it?

@ Paul Scholes

vstrad | | Permalink

I'd feel aggrieved. But as that is not analogous to the McLaren situation my feelings are neither here nor there.

All McLaren's expenditure on remaining a member of the FIA "club" is "wholly and exclusively" incurred for the purposes of its trade. Fact.

As it happens, I don't approve of McLaren's activities but that's just my own, individual code of ethics. My ethical code - or yours for that matter - shouldn't have any impact on the application of tax law. Why? Because any individual or company attempting to comply with their legal obligations has now way of knowing what my - or your - ethical code is and, should they differ, which they inevitably will, whose ethical code takes precedence. All they can do is comply with the law.

Paul Scholes's picture

Oh but it has always had an impact    1 thanks

Paul Scholes | | Permalink

As I repeat (again) this is not about the current law, which clearly allows this expenditure, it's about the company's own ethics in putting it on its tax return in the first place and about the general debate surrounding the changing attitudes to "it's legal so it must be OK" this is an ethical debate (fact :-)) and ultimately all laws are determined by the ethics of the day as to what is "right & wrong" (or in most modern governments, what is likely to kick up the least fuss)

thisistibi's picture

@Paul

thisistibi | | Permalink

I think that ethically, as a (presumably) successful accountant, you should pay more tax than the standard rate of income tax.  I feel that it is only ethical for you to make a bigger, voluntary contribution than the legal one, since you understand the very issues faced by the country.  What do you think about that?

Paul Scholes's picture

@thisistibi

Paul Scholes | | Permalink

What are the "very issues" and how does being an accountant make any difference to my understanding of them and if that is down to being successful or not, please define what you mean by successful.

Finally, if someone understands an issue to do with the governance or cultural issues of a country (or anything else for that matter) more fully than someone else, what justification is there for saying they should contribute more to its administration and maintenance?

Or is there a hidden message I'm missing?

thisistibi's picture

My point

thisistibi | | Permalink

My point, apparently not made clearly enough, was that ethics is not fact.... it differs from one individual to another and one day to the next. You can pretty much use it to support any argument you like..... perhaps that wealth should be distributed evenly across everybody in the uk/world so that there is no "rich" and no "poor".... and not to mention that it's "unethical" that people in the Uk have savings accounts whilst people starve to death in Africa.

While laws may be based on ethics, tax payment is not... it's necessarily based on the law. You can argue that the UK tax laws are unethical in not giving the right result, but you cannot argue that a company abiding by the tax law is unethical in doing so.

What is the point

asillahi | | Permalink

.....of carrying on with this. We have all made it clear that we are coming from 2 different points of view, thisistibi from a legal point and everyone else from an ethical point.

Get over it and move on.

Paul Scholes's picture

@thisistibi    1 thanks

Paul Scholes | | Permalink

I hope asillahi has got my point over better than I did.

I did not say that ethics are fact, the fact I stated was this debate is about ethics.

Ethics & democrasy developed hand in hand and, in the UK/EU, we are free to express our views on what we believe is right and wrong in a debate which, ultimately will either fizzle out or, as is likely here, will result in a change to the law.  Similarly you are free to push forward your ethical stance that successful accountants should pay more tax that unsuccessful ones.

So, I don't agree with your last sentence, I believe I have every right to complain at both the inadequacy or unfairness of a law I find unethical and at the behaviour of a company that I also believe to be unethical.  Others will put their view and we'll have a debate but simply saying "they are complying with the law so they are OK" is a cop out.

I'm off now, debates & brick walls don't mix.