First-tier Tribunal [2011] UKFTT TC01552
The appellant company was issued a closure notice by HMRC after an enquiry in to the legal costs incurred by the company to defend the reputation of the company and its sole director for the year ended 30 June 2008 amounting to about £460,000. The closure notice did recognise that there was a business element in the expenditure in that it was incurred to preserve the professional reputation of the sole director and the company. However, the closure notice concluded that the legal fees for the defamation proceedings had a “duality of purpose” – a business purpose for the company and a private purpose for the director and, therefore the full amount of the expenditure could not be claimed under s.74 of ICTA 1988. The closure notice disallowed 75% of the expenditure on the legal fees for the defamation action, and allowed 25% as a deduction.
The appellant sought a statutory review of the closure notice. A decision on the review dated 24 February 2011 upheld the closure notice in principle, but considered that the assessment should be varied to the extent that only 50% of the expenditure of the legal fees would be disallowed.
The appellant contended the whole of the legal expenses should be treated as an allowable deduction, that even if there was a duality of purpose the proportion of the expenditure that was personal to the director was 5% or less, and that any proportion that was personal to the director could not be treated as a sum falling to be charged under s.419(2) of ICTA.
The tribunal found that the sole purpose of bringing the defamation proceedings was to protect the business reputation of the company and that the director as a second claimant served the purpose of increasing the likelihood of the defamation claim succeeding. It also concluded that the sole purpose of bringing on the defamation suit was to protect the business reputation of the company and that any personal benefit to the sole director was an effect of, rather than a reason for, the expenditure on the defamation action. The appeal was allowed.
