Costs not justified for tax

The taxpayer a UK company was part of a group of companies the parent of which was BTC a Delaware corporation owned by two brothers who were also directors of the taxpayer business.

BTC its owners and sales manager were the subject of a US federal grand jury investigation for alleged breach of an embargo in relation to supplies made to Cuba in violation of the Trading With the Enemy Act 1917 and the Cuban Assets Control Regulations. They were convicted on some charges.

BTC initially paid the costs of the litigation but later decided the UK company should also contribute.

The taxpayer included a deduction for the legal expenses in its profits computation for corporation tax.

HMRC disallowed the claim under TA 1988 s 74(1)(a) on the basis the expenses were not incurred wholly and exclusively for the purposes of the company’s trade. The company...