KPMG loses McLaren appeal over tax relief for spying fine

A ruling allowing McLaren to claim tax back on a £32m fine for spying on rival Ferrari has been overturned by the UK’s Upper Tax Tribunal.

Yesterday (17 June) the tribunal overturned the controversial HM Revenue & Customs (HMRC) ‘spygate’ ruling in 2012, marking a loss for KPMG senior tax manager Angela Leal, instructing Temple Tax Chambers’ Alun James (19 December 2007). The team lost out to Devereux Chambers’ Akash Nawbatt and Christopher Stone, instructed by HMRC lawyers.  

The upper tribunal rejected the First-tier Tribunal’s view that cheating was part of the motor-racing business and said the fine imposed for employees disseminating Ferrari secrets was not “wholly and exclusively” a part of its trade.

Chamber president Mr Justice Warren and Judge Sinfield said the penalty was designed as a punishment and paid “because McLaren, through its employees, had engaged in conduct that was not in the course of its trade”.

They concluded: “The penalty was not wholly and exclusively laid out or expended for the purposes of McLaren’s trade and was not an allowable deduction for tax.”

In the 2012 decision, Judge Hellier said that cheating was as an everyday part of the racing trade, evidenced in the fact that Renault undertook the same behaviour. 

He said McLaren employee spying counted as activities “so closely associated with the mainstream of McLaren’s trade that I cannot say they were not part of it”.

The First-tier Tribunal held that the Formula One racing team was able, for the purposes of calculating its corporation tax profits, to deduct as a business expense the £32m fine imposed by the Federation Internationale de L’Automobile (FIA, motor-racing’s governing body) as a result of the “Spygate” affair.

However the Upper Tribunal ruled that obtaining information by breaching regulations did not class as a normal business activity. It added: “The fact that Renault also obtained confidential information in breach of the rules does not legitimise McLaren’s actions and amounts to no more than a justification of “they were all at it”.

The 2007 espionage scandal drew in a hoard of firms including Baker & McKenzie, CMS Cameron McKenna, legacy Hammonds and Lewis Silkin. Numerous barristers were also involved including Nigel Tozzi QC of 4 Pump Court for Ferrari and Cloisters Chambers’ Martin Palmer for former employee Martin Coughlan and his wife.

The controversy, also known as “Stepneygate”, involved allegations that the McLaren team was passed confidential technical information from the Ferrari team, and that the Renault F1 team was passed confidential technical information from McLaren.

McLaren was deemed to have contravened article 151c of FIA’s sporting regulations after a dossier of documents relating to the design and workings of Ferrari’s car were found in the possession of their then-chief designer Mike Coughlan.

The team was excluded from the 2007 constructors’ championship and fined a record $100m (which then equated to £66m), minus £34m of television and travel money lost as a result of its expulsion.

At the latest hearing, Tax Chambers’ James argued that cheating had never been asserted as a part of McLaren’s trade and should instead be viewed as an occupational hazard of the job. He submitted that the company could not be held liable in this case for the actions of employees which had overstepped the mark.

However the Upper Tribunal did not agree and allowed the HMRC appeal. 

The legal line-up:

For the appellants, Commissioners for HMRC

Devereux Chambers’ Akash Nawbatt and Christopher Stone, instructed by HMRC

For the respondent, McLaren Racing Ltd

Temple Tax Chambers’ Alun James instructed by KPMG senior tax manager Angela Leal