Are fines and penalties tax deductible

Fines and penalties are not deductible, whether imposed by a court, a regulator, a local authority or HMRC, because their purpose is to punish and a tax deduction would share that punishment with other taxpayers. The main exceptions are narrow: an employer can deduct a fine that was the employee’s own liability and is taxed on the employee as earnings, and a company can deduct late payment interest on corporation tax. Compensatory damages are treated differently from fines.

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Why are fines not deductible?

HMRC’s Business Income Manual at BIM42515 says a fine incurred as a result of a trader breaking the law is not allowable, on the authority of CIR v Alexander von Glehn Ltd (1920) 12 TC 232, because it is not incurred wholly and exclusively for the purposes of the trade. GOV.UK’s guidance for sole traders and partners lists fines for breaking the law, and fines or penalty charges on travel, among the costs you cannot claim.

The clearest explanation of the policy came later, from Lord Hoffmann in McKnight v Sheppard [1999] 71 TC 419. The purpose of a fine or penalty is to punish the taxpayer, and a court may easily conclude that the legislative policy would be diluted if the taxpayer were allowed to share the burden with the rest of the community by a tax deduction (BIM42515 and BIM37965). In that case the Special Commissioners also held that the stockbroker’s disciplinary fines were a loss not connected with or arising out of the trade, now section 34(1)(b) ITTOIA 2005.

It follows that it makes no difference that the fine arose while doing business, that it was unavoidable in practice, or that paying it was cheaper than compliance. The punitive character is what blocks it.

Are HMRC penalties and interest deductible?

For HMRC penalties the law is explicit. Section 54 ITTOIA 2005, for income tax, and section 1303 CTA 2009, for corporation tax, list penalties and interest for which no deduction is allowed. They include penalties for inaccuracies under Schedule 24 Finance Act 2007, penalties for failure to notify and similar failures under Schedule 41 Finance Act 2008, penalties under Schedule 16 F(No 2)A 2017, VAT penalties under sections 60 to 70 VATA 1994, and interest under section 101 Finance Act 2009 on VAT. The tables also cover excise duties, insurance premium tax, landfill tax, climate change levy, aggregates levy, customs duties and Stamp Duty Land Tax.

BIM42520 adds an important point: some HMRC penalties are not on the list, but that does not make them deductible. HMRC says penalties are not normal recurring costs of agreeing a tax liability and are unlikely to be incurred wholly and exclusively for the trade. The current regimes are summarised in the HMRC penalties table and, for VAT, VAT penalty points.

Interest is where income tax and corporation tax differ

For income tax, section 54 disallows interest under Part 9 of the Taxes Management Act 1970, so a sole trader cannot deduct interest on late paid income tax. Section 1303 does not include that row. GOV.UK’s guidance on corporation tax interest says any late payment interest a company pays to HMRC on corporation tax, including on late quarterly instalments, is tax deductible for corporation tax purposes in the period in which it is incurred. Interest on late VAT is disallowed for both. See HMRC late payment interest.

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Can an employer deduct a fine it pays for an employee?

This is the main exception, and it turns on whose liability the fine is. BIM42515 says that where an employer pays a fine that is the employee’s liability, so that the employee is taxable on the payment as employment income, the cost to the employer is allowable. In effect it becomes an additional employment cost.

Parking penalties show how the rule works. A penalty is the employee’s liability if the notice was handed to them at the time, or if the employee owns the car. If the notice was fixed to a car the employer owns, and the employer pays as the registered keeper, there is no employment income charge on the employee, and the employer’s payment is disallowed (BIM42515). HMRC’s Employment Income Manual at EIM21686 sets out the employee side.

Situation	Employee	Employer deduction
Notice fixed to car registered to the employer, employer pays	No tax charge	Disallowed
Notice fixed to car registered to the employee, employer pays or reimburses	Taxable as earnings or a benefit	Allowed
Notice handed to the employee, employer pays or reimburses	Taxable as earnings or a benefit	Allowed
Employee voluntarily pays notice on employer’s car and is reimbursed	Taxable as earnings	Allowed

The deduction is the reward for treating the payment as pay. A business that pays employees’ fines and does not run them through payroll or report them as a benefit loses the deduction and also faces a PAYE problem. Reporting is covered in benefits in kind and form P11D.

What about regulators and professional bodies?

BIM42515 distinguishes between a regulator’s charges and its penalties. Where a trader pays a regulator a revenue liability broadly meant to cover the regulator’s costs of supervising the trade, it is normally allowable even if the trader has breached the rules. A penalty imposed by a regulatory body for a breach, or a fine following a prosecution for breach of regulations, is not.

The costs of fighting the case are a separate question. In McKnight v Sheppard, the stockbroker’s legal fees of over £200,000 on the disciplinary proceedings were deductible because his only purpose was to save his business, while the fines were not (BIM37965). By contrast, the costs of an individual defending a criminal charge will normally have a private purpose of avoiding conviction (BIM37955). See are legal and professional fees tax deductible.

Are damages and settlements treated like fines?

No. BIM37960 says civil damages are generally allowable, though they are disallowed where the spending in fact serves a dual purpose. BIM42515 explains the line Lord Hoffmann drew: damages that are compensatory may be allowed, damages that are punitive are not. It gives the example of defamation damages paid by a newspaper, where such claims are a regular and almost unavoidable incident of publishing.

For settlements, BIM42515 says a revenue payment settling a civil action arising out of the trade may be allowed where the allegations were neither admitted nor proved, following Golder v Great Boulder Proprietary Goldmines Ltd (1952) 33 TC 75. Where liability was admitted or proved, the payment may be allowed if restitutionary, but not if punitive.

Are bribes or other crime related payments deductible?

Never. Section 55 ITTOIA 2005 and section 1304 CTA 2009 deny any deduction for a payment whose making is a criminal offence, or a payment outside the UK that would be a criminal offence if made here. Section 55 also blocks payments made in response to blackmail or extortion.

How does this look in practice?

Illustration only. A delivery company’s accounts for the year include £900 of parking penalties on its own registered vans, paid directly by the company; £300 of penalties handed to two drivers personally, which the company reimbursed through payroll; a £400 HMRC penalty for a careless error in a VAT return; £250 of late payment interest on corporation tax; and £600 of interest on late paid VAT. For corporation tax, the company adds back the £900, the £400 and the £600. The £300 reimbursed through payroll and the £250 of corporation tax interest remain deductible.

What mistakes come up most often?

Leaving parking and speeding penalties in motor expenses.
Deducting HMRC penalties because they are not on the statutory list.
Assuming late payment interest is always deductible, when only corporation tax interest is.
Reimbursing employees’ personal fines without taxing them, then claiming the deduction.
Treating a regulator’s penalty as a regulatory levy.
Assuming legal costs follow the fine, when they can be deductible even though the fine is not.

For the general test, see the wholly and exclusively rule.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.