Q: Are parking fines tax-deductible?
A:
It depends! A number of cases
have established the principle that fines and penalties are not deductible if
the intention behind the fine or penalty is to punish a wrong-doer. The principle has been applied to an exporter
who was fined £3,000 for exporting goods to “enemy territory” during the Great
War; to a stockbroker allegedly guilty of gross professional misconduct; and to
a Formula One racing team fined for having unauthorized access to a rival
team’s secrets. In each case the
principle was that the purpose of the fine or penalty was “to punish the
taxpayer” such 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”.
Parking fines may seem a long way from the
Great War and Formula One (or, on reflection, perhaps not); but the same
principle applies. If a business incurs
a parking fine (or a fine for any other motoring offence) it’s not
tax-deductible. This remains the case
even if fines are incurred regularly and unavoidably as an occupational hazard
of the business (think delivery drivers in Central London, for example). But there are some subtleties.
First, in a business where there are
employees, you have to be careful to establish who has actually incurred the
fine: is it the business itself (in which case the rule above applies)? Or is it the employee? Remember that most motoring offences are in
law committed by the driver, not by the vehicle owner. Where the business pays a fine or penalty for
an offence which is committed by an employee, the payment takes on the quality
of remuneration of the employee in question, and as such is tax-deductible for
the employer (though it ranks as taxable income in the hands of the employee,
for whom it is non-deductible).
Second, and more positively, distinguish
between fines and contractual payments.
If I contravene a local authority parking regulation, the fine I incur
is within the “punishment principle” and is not tax-deductible. On the other hand, if I overstay my time in a
private car park, the “penalty charge” is really a misnomer: it is not in
reality a penalty but is simply an additional payment which I have agreed to
pay under the contract governing my use of the car park. It is therefore tax-deductible to the same
extent as the initial parking charge. Of
course, to be tax-deductible it must still pass the test of being incurred
wholly and exclusively for the purposes of the trade (or, in the case of an
employee, “necessarily incurred on travelling in the performance of the duties
of the employment”); but the “punishment principle” has no application to such
“penalty charges”.
Author: David Whiscombe, BKL Tax, 020 8922 9306, david.whiscombe@bkltax.co.uk