The Court of Appeal (CoA) has judged on a case where a taxpayer sought to reduce his liability to income tax by stating that a payment made to stop proceedings against himself that could have made him bankrupt were necessary and therefore deductible.
The taxpayer was and is a solicitor and had been a member of an overseas partnership that had folded. The overseas partnership allegedly owed funds to a German bank and this bank held the UK taxpayer liable and threatened to commence legal proceedings. To stop these proceedings the taxpayer paid €300k to the bank. There was a real prospect that the taxpayer would have been made bankrupt by these proceedings and if made bankrupt he wouldn’t have been able to continue in his chosen profession. The taxpayer then subsequently became a member of a UK partnership and continued to practice law but would have had to leave the partnership if made bankrupt.
In his tax return he deducted the payment to the bank against his earnings from the UK partnership. HMRC said they were non-deductible, but the First-tier Tribunal (FTT) sided with the taxpayer. The Upper Tribunal (UT) disagreed with the FTT and found for HMRC. The CoA has also agreed with HMRC and dismissed the taxpayer’s appeal.
The CoA first considered what trade took place during the relevant tax year and found that the business of the UK partnership was the relevant trade. The taxpayer had held that there were various trades within the partnership, being each partner’s trade. The CoA agreed with the UT that for income tax purposes only one trade existed, that of UK partnership and that trade was then split amongst the varying partners.
The CoA went on to further note that the payment to the German bank was not made “wholly and exclusively for the purposes” of the partnership’s trade. There was no discussion by the management board of the UK partnership to make a payment to the German bank and the payment was made by the taxpayer for personal reasons to protect his reputation and career. The payment was not made to protect the reputation of the UK partnership.
The decision can be found at: Vaines v HM Revenue and Customs [2018] EWCA Civ 45 (25 January 2018) (bailii.org)
Please do contact us if you are uncertain whether certain expenses are deductible in computing the profits of a trade or profession to income or corporation tax. These are matters we are very experienced with.
