Parking fines often deduct serotonin, but are they tax-deductible? David Whiscombe answers this question for UK200Group Tax Talk.
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”.