Tax deductions for health and safety costs

Tax deductible

You might reasonably think that any expense your business incurs in the course of trading ought to be tax deductible. For example, a fee charged by the Health and Safety Executive (HSE) for advice following an inspection. But the general tax rule says that expenses are deductible where they are incurred “wholly and exclusively for the purpose” of its trade and are not excluded from deduction by specific tax legislation. Legal precedents may also block tax deductions.

A fine or a fee

The first step in deciding the tax treatment of any expense is to determine its exact purpose. HSE fees (so-called intervention fees), appear to be a charge for providing guidance about health and safety issues. Further, the fees are worked out according to the time spent by HSE officers. This would imply that they are deductible. However, health and safety intervention fees are only charged if the rules have been broken. In effect, they are a fine, and this can change the tax treatment.

Fines and penalties. There are no specific tax rules which prevent the deduction of a fine or penalty but the expense must still meet the “wholly and exclusively” condition and not be contrary to any legal precedent which prevents deduction.

Legal precedent

The most important precedent appeared in McKnight v Sheppard 1999 . The judges ruled that no deduction can be given for a fine or penalty because “its purpose is to punish the taxpayer” and allowing a tax deduction “diluted” its effectiveness at cost to taxpayers in general. However, the ruling does not, despite HMRC’s frequent insistence to the contrary, prevent a tax deduction for all fines and penalties.

Payments which are compensatory, e.g. an excess parking charge from a private company, are not precluded from tax deduction by reason of the precedent. However, the “wholly and exclusively” condition must still be met.

The wholly and exclusively condition

This condition was looked at in the case of McLaren Racing Ltd v HMRC 2014 in the context of a fine levied by an international racing body because the company obtained information about its competitors through spying. The company might have been allowed a tax deduction but for the wholly and exclusively condition. The Upper Tribunal said that “the activities which gave rise to the penalty”, i.e. spying on its competitors “were not carried out in the course of McLaren’s trade”.

Back to health and safety. Even though a health and safety intervention fee may pass the wholly and exclusively test because it can be incurred in the normal course of a trading, it fails to qualify for a tax deduction by reason of the precedent set in McKnight v Sheppard, i.e. it would dilute the fine at the cost to the taxpayer.

A fee charged by a health and safety consultant is not a fine and so is tax deductible even if they find that you’re breaking the rules. This goes to show that prevention is better than cure.