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Crime Related Payments: Are they deductible?

A deduction is not allowed for expenditure if making the payment constitutes a criminal offence (or if, in making a payment outside the UK, it would be a criminal offence if made in the UK, from 1 April 2002). Examples include payments for stolen goods, and bribes to win contracts.

In addition, payments in response to demands which constitute blackmail (or extortion, in Scotland) are not deductible in calculating trading profits, such as payments to criminal gangs for “protection”.

Any deduction against income is specifically denied by statute. However, in all probability it would also be denied under the general “wholly and exclusively” rule.

This restriction also applies to management expenses of an investment company (under CTA 2009, s 1219) and the ordinary basic life assurance and general annuity business (BLAGAB) management expenses of insurance companies carrying on long-term business (for the purposes of FA 2012, s 76).

The restrictions also apply to the incidental costs of making that payment (BIM43101).

However, other expenses arising out of blackmail may be allowable on general principles, such as guarding premises and replacing damaged goods, subject to the normal tests that the expenditure is not capital and it is incurred wholly and exclusively for the purposes of the trade and they are not criminal payments (BIM43180).

By Bloomsbury Professional