McLaren are one of the top Formula One motor racing teams. They are not only experts at ensuring cars are driven fast around racing circuits but they are also experts at ensuring that £34m fines are tax deductible…
Back in 2007 McLaren were fined £34 million pounds because it “had possessed and in some way used proprietary information belonging to Ferrari, and had thereby breached the rules of the FIA’s International Sporting Code to which McLaren was contractually bound”.
Or to put it another way, they had cheated by photocopying an 800 page technical document belonging to Ferrari that detailed the designs of the 2007 Ferrari cars.
Formula One’s governing body, the Federation Internationale de L’Automobile (FIA), weren’t happy about McLaren taking this approach and ordered McLaren to pay a £34m fine which they duly did.
The interesting thing though is that in their UK company tax return McLaren claimed a tax deduction for the fine.
In the UK as well as most countries around the world, fines are not tax deductible. This means that the expense does not reduce the level of profits on which tax is calculated.
McLaren argued though that this particular fine was tax deductible (i.e. the expense could be used to reduce the level of profits on which tax was applied). They said that it wasn’t a statutory fine for breaking the law (which would be non tax deductible) but instead was a fine imposed by their governing body and as such was a genuine business expense incurred in their trade which should be tax deductible.
The UK tax authorities understandably didn’t agree with this viewpoint and the argument went to an independent tax tribunal who surprisingly agreed with McLaren and said that the fine was tax deductible.
A surprising decision and there’s no truth in the rumour that the head of the independent tax tribunal is currently driving around in a McLaren…