Sadly, many businesses fall foul of criminal activity and the growing threat of cyber-crime is just one example of how traders can lose money. Once the mess has been cleared up and the insurers have made their decision the question of tax consequences may arise.

Generally business losses are tax-deductible and this can be the case for the costs of criminal activity hitting the business. The HMRC manuals cover this point:

“[BIM45851] Specific deductions: losses: of stock or cash by fire etc

Allow to the extent not covered by insurance

The loss of stock-in-trade or of cash in hand by fire, burglary, theft or the negligence of an employee is, in the ordinary course of events, an allowable deduction.

Where the loss is covered in whole or in part by insurance for the treatment of sums received under the policy see BIM40751.

[BIM40751] Specific receipts: insurance recoveries: whether trading receipts

The following recoveries are trading receipts:

• Recoveries to compensate the trader for a hole in the commercial profits - either because an incoming fails to materialise or an additional outgoing is incurred, and even if the compensation exceeds the hole in profits or there is eventually no matching revenue outgoing.

• Insurance of stock-in-trade - including the excess, if any, of the amount received over the cost to the trader of the stock concerned or its value in his books.

• Capital recoveries in respect of fixed assets, to the extent that they are used to make good a loss or expense deducted in calculating the profits of a trade.”

Conversely criminals should beware. The courts have ruled that held that the illegality of an activity from which profits were derived has no bearing on the taxability of profits therefrom if that activity had the characteristics of a trade. However, in a tribunal case the special commissioner decided that drugs found in an individual's garage belonged to the taxpayer but he was not carrying on a trade in respect of them.

The HMRC view [BIM42955] is also that a payment made to compensate for illegal actions is unlikely to be tax-deductible.

Similarly bribes are on the naughty list. The HMRC manuals PIM2060 state that a deduction can't be claimed for payments that are:

• criminal in themselves; for example, a bribe to secure a contract, or

• made in response to a blackmail threat.

As with all such tax situations, advice should also be sought before proceeding.
For further details call Alan Boby on 01295 250401 or email aboby@ellacotts.co.uk

Disclaimer:
UK200Group is an association of separate and independently owned and managed accountancy and law firms. UK200Group does not provide client services and it does not accept responsibility or liability for the acts or omissions of its members. Likewise, the members of UK200Group are separate and independent legal entities, and as such each has no responsibility or liability for the acts or omissions of other members.

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