18. Letter from Dawn Primarolo MP,
Paymaster General, HM Treasury to the Chairman of the Committee
You wrote to me on 15 February asking me about
the treatment of protection money for tax purposes.
Before 1993, the legality of a payment was not
a factor in deciding whether expenditure could be deducted in
computing the profits of a trade. The only test was whether expenditure
is incurred wholly and exclusively for the purposes of the trade.
It was possible that a payment such as protection money paid by
a trader to protect his business (but not his own person or his
family) qualified for a deduction for tax purposes.
In relation to expenditure incurred after 10
June 1993, Section 577A of Income and Corporation Taxes Act 1988
now for income tax purposes, Section 55 Income Tax (Trading and
Other Income) Act 2005 denies tax relief for payments the making
of which constitutes a criminal offence.
The purpose of Section 577A is to ensure that
those guilty of certain criminal offences are not indirectly subsidised
through the tax system ie payments tainted with criminality should
not be allowed a tax deduction.
1 March 2006
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