Is tax deductible if company funds are lost through fraud?

One of our clients has been the victim of a scam that resulted in the director making a significant transfer from the company’s business bank account to a fraudster impersonating a trade supplier. Can we claim a tax deduction?

1. General Accounting and Tax Principles: The courts have interpreted that if a deduction is allowed under general accounting rules (GAAP), it is permitted unless expressly prohibited by tax legislation. Trade profits are first calculated using GAAP and then adjusted according to any tax rules.
2. GAAP and ‘True and Fair View’: The payment must be considered under GAAP rules to determine whether it can be deducted. If the payment meets GAAP standards, the next step is to apply statutory tax rules.
3. Permissive vs. Prohibitive Rules: Permissive tax rules generally take precedence over prohibitive rules, except in certain cases (e.g., capital expenditures prohibited under s53 of CTA 2009). Prohibitive rules mainly target capital transactions rather than revenue expenses.
4. Theft of Cash vs. Abortive Purchase: In this case, the fraud involved a non-existent trade transaction, so the expenditure cannot be treated as a purchase of stock. Instead, it could be classified as a theft of cash. HMRC guidance (BIM45851) suggests that theft of cash in hand, when in the ordinary course of events (e.g., fire, theft), is usually an allowable deduction.
5. Capital vs. Revenue Expenditure: If the payment is found not to be a capital expenditure, it could be deductible. If the deduction passes the “wholly and exclusively” rule under s54 CTA 2009, meaning the payment was made for the sole purpose of trade, it may be allowed.
6. Uncertainty and Documentation: There is no clear-cut source to determine the correct treatment for this type of loss. The treatment depends on the facts and circumstances of each case. If a deduction is claimed, detailed records, including a police report, should be kept. Any recovery of funds later would be taxable.

In summary, the deduction’s eligibility hinges on whether the loss is considered a theft of cash in the ordinary course of business and whether the payment passes the “wholly and exclusively” test. A view needs to be taken based on the specific case.

If  you have questions, Jermyn & Co. is here to help you.