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TMI Blog1999 (6) TMI 482X X X X Extracts X X X X X X X X Extracts X X X X ..... hy Brennan for the Crown. David Goldberg Q. C. and Hugh McKay for the taxpayer. Their Lordships took time for consideration. 17 June. Lord Hoffmann. My Lords, the respondent taxpayer is a stockbroker who in 1986-87 incurred legal expenses of some 200,000 defending himself against proceedings before the disciplinary committee of the Stock Exchange and appearing before the appeals committee. The question is whether the deduction of these expenses for the purpose of computing the taxpayer s profits under Case I of Schedule D is excluded by section 130(a) of the Income and Corporation Taxes Act 1970 on the ground that it was not money wholly and exclusively laid out or expended for the purposes of the trade. The taxpayer was charged on 17 counts, of which 12 alleged gross misconduct, for which the penalty could be expulsion or suspension. He was found guilty on four charges of gross misconduct (including one finding of dishonesty) and three charges of ordinary misconduct. He was ordered to be suspended for six months. The suspension was itself suspended pending an appeal. The appeals committee confirmed two of the findings of gross misconduct (including the one involvin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that the taxpayer had two purposes in paying the legal expeses. One was the preservation of his business and the other was the preservation of his personal reputation. It followed that he had a dual purpose and the trade purpose thus lacked the necessary exclusivity : See Mallalieu v. Drummond [1983] 2 AC 861. I do not think that the special commissioner s careful findings of fact lend support to this criticism. He recorded the taxpayer [1996] S. T. C. 627, 636 as saying in evidence that he did not care about his personal reputation (paragraph 71). While accepting the taxpayer as an honest witness nine years after the event, he did not accept that this correctly reflected his attitude at the time. He said that the taxpayer would have had to be extraordinarily thick-skinned not to have experienced feelings of personal distress at the effect of the charges upon himself and his family (paragraph 72). But he went on to make the following important finding (paragraph 74) : However, the fact that I do not accept that the taxpayer was wholly unconcerned with his personal reputation does not necessarily mean that his purpose in laying out the legal costs was not exclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistency between his conclusion of law and his findings of fact. Mr. Grabiner s second point was that the words for the purposes of the trade meant that the expenditure must be in furtherance of the relevant commercial activity. There must be a sufficient connection with the earning of profits in the trade. This was not a case like Morgan v. Tate Lyle Ltd. [1955] AC 21 in which the taxpayer was defending his business against an external threat. This expenditure resulted from the taxpayer s own misconduct, that is to say, from behaviour outside the proper scope of his trade. Mr. Grabiner referred to Inland Revenue Commissioners v. Alexander von Glehn Co. Ltd. [1920] 2 KB 553, in which the Court of Appeal disallowed the deduction of a penalty imposed upon a company during the First World War under the Customs (War Powers) Act 1915 for exporting goods without taking all reasonable care to secure that the ultimate destination should not be enemy territory. Lord Sterndale M. R. said that although the incurring of the penalty was connected with the trade, in the sense that it would not have happened unless the trade had been carried on, it was not for the purposes of the trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Appeal accepted, incurred in the course of the company s trade. There must therefore have been something in the nature of the expense which prevented it from being deductible. I think with great respect that the Court of Appeal had difficulty in identifying exactly what this was because they were looking in the wrong place. They hoped to find the answer in the broad general principles of what counts as an allowable deduction. But the reason in my opinion is much more specific and relates to the particular character of a fine or penalty. Its purpose is to punish the taxpayer and a court may easily conclude that the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a deduction for the purposes of tax. This, I think, is what Lord Sterndale M.R. meant when he said that the fine was imposed upon the company personally. By parity of reasoning, I think that the special commissioner and the judge were quite right in not allowing the fines to be deducted. It does not follow, however, that the costs were not deductible. Once it is appreciated that, in a case like this, non-deductibility depends upon the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sful defendant should have to bear his legal costs personally in the same way as the penalty itself. But I think there would be great difficulties about giving effect to such a rule. It might not be easy to tell which costs had been expended successfully and which unsuccessfully. The taxpayer may, as in this case, have been convicted on some counts and acquitted on others. He may have had substantial success in mitigation of the penalty. More important, it is fundamental that everyone, guilty or not guilty, should be entitled to defend themselves. I do not see that any clear policy would be infringed by allowing the deduction of the legal expenses incurred in resisting the disciplinary proceedings. On the contrary, I think that non-deductibility would be in effect an additional fine or penalty for which the regulatory scheme does not provide. The special commissioner was therefore right to treat the case as governed by the general principle in Morgan v. Tate and Lyle Ltd. [1955] AC 21. I would dismiss the appeal. Lord Mackay of Clashfern. My Lords, I have had the advantage of reading a draft of the speech prepared by my noble and learned friend, Lord Hoffmann. For the reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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