G4S Cash Solutions were given the penalty charge notices (PCNs) while delivering consignments of cash over the pavement. The firm claimed these were a business expense incurred for the purposes of trading and so could be used to reduce its profits for tax purposes.

HMRC disagreed, saying that this went against the long standing view that fines for breaking the law cannot be used to reduce a tax bill. [G4S Cash Solutions (UK) Ltd and the Commissioners for Her Majesty’s Revenue & Customs, TC05015, [2016] UKFTT 0239 (TC)].

The appeal concerned two discovery assessments issued by HMRC in respect of the corporation tax computation for the accounting periods ending 31 December 2007 and 31 December 2008 for £158,170 and £157,711 plus interest; and two closure notices issued by HMRC for the accounting periods ended 31 December 2009 and 31 December 2010. Those closure notices amended G4S’s returns by £124,679 and £139,667 respectively.

The tribunal was told these sums related to payments made to settle PCNs given to drivers who were dropping off cash consignments to clients. It heard evidence that G4S incurred approximately 10,000 PCNs a year in each of the 2008, 2009 and 2010 calendar years.

The  vast majority of these (approximately 80%) were down to four particular contraventions: parking or loading/unloading where waiting and loading/unloading restrictions are in force; stopping  where prohibited on red route or clearway; stopping on a restricted bus stop or stand;  and parking  with one or more wheels on or over a footpath or any part of a road.

While the company had been able to negotiate agreements over potential parking infringements with some local authorities, it had not got such arrangements with the 10 London boroughs and Transport for London, which accounted for many of the PCNs issued.

GS4’s argument was that payments made to settle these PCNs were made wholly and exclusively for the purposes of its trade, or alternatively that they were  a loss arising out of or connected with that trade. 

For its part, HMRC said PCNs are statutory fines imposed for a breach of the law by the drivers, and that a fine imposed by statute for a breach of the law is non-deductible in calculating profits for the purposes of corporation tax.

G4S argued that its role in delivering cash was a ‘social utility’ and could not be carried out safely without incurring parking infringements, because of the need to be as close as possible to the point of delivery and the need to observe tight timeframes, in light of the risks of robbery. For that reason, it had ‘an entirely exceptional case’ in relation to the proposed PCN deductions.

The company’s lawyer said there was no black or white in this matter, and the tribunal judged agreed ‘wholeheartedly’, saying: ‘In our view, the palette is many shades of muted grey.’

However, the FTT pointed out that after the periods under discussion, G4S had invested heavily in a major exercise to reduce the number of PCNs incurred. This had included retraining of drivers, reappraisal of customer locations and parking options and amendment of processes. As a result, the company recorded a 50% cut in the number of fine received after six months.

This suggested that PCNs were not a necessary result of having to work in a certain way in order to ensure the personal safety of members of staff or the public, as G4S sought to argue.

The judge said: ‘We have found that a number of PCNs were incurred because the appellant does  not wish to lose to its competitors a customer with premises which are difficult to access safely without breaching parking restrictions or limited time windows where that particular branch is part of a larger national framework contract. That is a commercial and strategic decision and the consequential PCNs are inevitable for that reason.’

The judge agreed that making cash deliveries is an essential service, but did not accept G4S’s argument that it has a unique role because it holds a significant share of the market.

The judge said: ‘HMRC are quite clear that the appellant's dominance of the market neither places it in a unique role or entitles it to separate tax treatment and that  it simply cannot be the only company in the UK that would be entitled to deduct fines incurred for breach of the law; that would be inequitable.’

The FTT ruling also stated: ‘We do not find that the appellant, in the periods with which we are concerned and specifically the relevant period, only claimed deductions for PCNs which were unavoidable because of a safety imperative.’

In its conclusion, the tribunal said that while the cost of a PCN is paid in connection with the trade, the crucial words are: ‘wholly and exclusively for … the trade’.

The rule is only satisfied if the taxpayer’s sole purpose for incurring the expense is for the purpose of the trade. If there is a non-trade purpose then the expenditure is not allowable even if there are also one or more business benefits in making the expenditure.

In G4S’s case, the trade is not that of breaking the law, the FTT said, ruling: ‘The breach of the law is a deliberate activity, which is undoubtedly for commercial gain and comes about as a result of activity in the course of the trade...’

As a result, the FTT dismissed G4S’s appeal.

Jim Harra, HMRC’s director general of business tax, said: ‘We’ve always said fines incurred for breaking the law are not tax deductible.

‘The tribunal has now established a clear precedent for rejecting any future such claims.’

The FTT ruling, G4S Cash Solutions (UK) Ltd and the Commissioners for Her Majesty’s Revenue & Customs, TC05015, [2016] UKFTT 0239 (TC) is here