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McKnight v. Sheppard [1997] STC 846 (C.A.)

Mr Sheppard is a stockbroker. In the late 1980’s he incurred legal costs of £200,000 odd and had to pay a Stock Exchange fine of £50,000. The costs were in respect of representation by Counsel and solicitors before a Stock Exchange disciplinary tribunal and an appeal. Mr Sheppard had been accused of various breaches of the Stock Exchange rules most of which were not proved (and a later tribunal “substantially” vindicated him).

The Special Commissioner found as a fact that Mr Sheppard had incurred the legal expenditure to save his stockbroking business from destruction. Accordingly, they were deductible under (what is now) s.74(1)(a) ICTA 1988. The fines were not deductible under s.74(1)(e) ICTA 1988 because of IRC v. Alexander von Glehn 12 TC 232.

The Court of Appeal upheld the Special Commissioner’s conclusion on the legal fees (the fines were not in issue before the Court of Appeal). Section 74(1)(a) posed a single test. There was no further test of sufficient connection with the trade as Lightman J has suggested in this case. Since the Special Commissioner had made the above findings of fact, the only issue on appeal was whether that was a proper finding on Edwards v. Bairstow 36 TC 307 principles.

David Goldberg QC and Hugh McKay appeared for the taxpayer