Expenses incurred in defending partners against criminal charges were incurred "wholly and exclusively" for the business and were deductible

16 February 2022

In TR, SP and SR Rogers v HMRC [2021] UKFTT 0458 (TC), the First-tier Tribunal (FTT) decided that expenses incurred defending two of the partners of a partnership against criminal charges were incurred "wholly and exclusively" for the business of the partnership and the expenses were therefore deductible.


Mr S Rogers and his parents (the Appellants) ran a scrap metal business, which traded as T R Rogers and Sons, as a partnership. As a result of an operation conducted by Thames Valley Police, criminal charges were brought against Mr S Rogers, Mr T Rogers, and a number of employees. Mr T Rogers was found not guilty at the first trial and Mr S Rogers was found guilty of one count of attempting to conceal, disguise or convert criminal property. Mr S Rogers successfully appealed his conviction before the Court of Appeal.

The legal costs incurred in defending the criminal charges brought against Mr T Rogers and Mr S Rogers (the Relevant Expenses) were claimed as a deduction in the partnership accounts, as being "wholly and exclusively for the purposes of the trade". HMRC opened enquiries into the relevant tax returns and ultimately issued a closure letter which disallowed the Relevant Expenses. Following a review requested by the Appellants, HMRC upheld its decision. The Appellants appealed to the FTT.

FTT decision

The appeal was allowed.

Section 34(1), Income Tax (Trading and Other Income) Act 2005, provides that, in calculating the profits of a trade, no deduction is allowed for (a) expenses not incurred wholly and exclusively for the purposes of the trade, or (b) losses not connected with or arising out of the trade.

The Appellant argued that HMRC was wrong to disallow the Relevant Expenses, as they were incurred solely for the purposes of the partnership's trade. HMRC argued that the Relevant Expenses were not incurred wholly and exclusively for the purposes of the trade, as they had an intrinsic duality. HMRC was of the view that there were three reasons to defend the accusations and initial conviction, namely: (1) prevention of a prison sentence; (2) defence of personal reputation; and (3) for the benefit of the trade.

After considering the evidence, the FTT concluded that the purpose of incurring the Relevant Expenses was defence of the trade. The FTT disagreed with HMRC that ‘defence of liberty’ was a concern. The FTT said that the evidence which HMRC had produced of a scrap metal dealer going to prison was in relation to an irrelevant case. The FTT concluded that it was extremely unlikely that Mr S Rogers ever considered he would go to prison, given that he had been informed by his lawyers that he had a strong case and the alleged crime related to one purchase.

The FTT disagreed with HMRC that a conviction would not have had a significant impact on the business and that the partnership would have been able to continue trading. The business' lease would have been terminated and finding a new site for the business would have been very difficult. The FTT commented that if the conviction had been upheld, it was unlikely the police would have considered it appropriate for the partnership's scrap metal dealer's licence to be continued in circumstances where the main partner had been convicted of a serious offence.

The FTT considered whether the defence of the trade was the exclusive reason for incurring the Relevant Expenses, or whether there was a subsidiary and intrinsic reason of defence of personal reputation’ The FTT agreed with Mr S Rogers that the damage to his personal reputation was primarily incurred at the time of the police operation, which was reported in the local media. 

The FTT noted that, within 24 hours of the police operation, multiple important trading stakeholders were making it very clear to the partnership that the issue was being taken extremely seriously and that conviction would lead to the withdrawal of the business' lease, insurance, banking services and various licences, and certain customers/suppliers would no longer deal with them. The FTT therefore concluded that any defence of personal reputation was not a consideration when incurring the Relevant Expenses, although the consequence of the Court of Appeal judgment was that the personal reputation of Mr S Rogers may have improved slightly.

In the circumstances, the FTT found that the purpose of incurring the Relevant Expenses was "wholly and exclusively for the purposes of the trade".


Although cases relating to "wholly and exclusively for the purposes of the trade" are fact-specific, HMRC's long-standing position of not allowing businesses to deduct legal expenses incurred in defending directors or partners in criminal proceedings may now be challenged in circumstances similar to the instant case. It is refreshing that the FTT appears to have taken a sensible approach in this case when determining whether the relevant legal test was satisfied.

The decision can be viewed here.

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