Formula 1 McLaren Team Cheating Fine is Tax Deductible!

There are times when tax law appears to lead to strange results and at first glance that might appear to be so in the McLaren cheating fine case which was in the papers recently.

When I first heard that McLaren were to receive tax relief on their fine I thought that can't be true, but having taken a closer look at the facts of the matter I have to accept that there is a good case to argue why this should be correct.

In many sporting arenas, pushing boundaries in order to win is all part of the sport. The line between acceptable innovation and cheating is a fine one especially in a technologically advance sport such as Formula 1.

McLaren’s accountants have argued that the penalty incurred by their team was a natural consequence of pursuing their business of winning Formula 1 races. Whilst they had been found to have broken the rules of the sport, they stress that the penalty was not imposed for breaking any of society’s laws.

Tax law states that in order for expenditure to be tax deductible in a business it needs to be incurred wholly and exclusively for the purpose of the trade. I am not sure of the detailed rules of Formula 1 but my assumption is that had McLaren not paid this fine they would have been excluded from continuing in the sport. Unlike a civil or criminal penalty which must be paid in order for the individual to avoid personal consequences, the argument goes that the only reason for McLaren to have paid this penalty was to continue to compete in formula 1. The expenditure would therefore be incurred wholly and exclusively for the purpose of the trade rather than any other purpose. As counter intuitive as it seems, I think they probably have a point.