Fines, penalties, VAT and other taxes

HMRC has for a long time held the view thatfines and penalties are not tax deductible and we agree. However, not all excess parking charges are fines or penalties even where they are described that way by the person or organisation charging them. The rules which determine when you can or can’t deduct a fine from your profits are tricky to follow (yr.14, iss.15, pg.5, see The next step ), but the VAT position is different.

Business purpose

The good news is that for VAT there are fewer rules to consider than there are for income and corporation tax. Essentially, if you or one of your employees or contractors incurs a fine while in the course of work, which your business pays, the VAT on it can be reclaimed, if it’s VAT registered of course. The trouble is that it’s often not obvious whether VAT has been charged because invoices and receipts for fines of less than £250 don’t always show VAT separately.

When is VAT charged?

Until 2013 the VAT treatment of parking fines was unclear. The Court of Appeal then clarified the position as follows:

Local authorities. Parking fines charged by local authorities aren’t liable to VAT. Even where a VAT registration number is shown on the parking penalty notice the fine will not include VAT and so there’s nothing for you to reclaim.

Private car parks. Car park operators, e.g. NCP, may or may not charge VAT on finesdepending on how they describe charges they levy for overstaying.

  • Where the terms and conditions say that overstaying is not permitted and a penalty will be charged for doing so, the fine is not subject to VAT.

Tip. If VAT is charged, only pay the net amount and tell the car park owner why you have done this, i.e. because they have incorrectly charged VAT.

Note. If you pay VAT which should not have been charged, strictly you aren’t entitled to reclaim it.

  • If the terms and conditions say that overstaying will result in an additional charge for parking, even if it’s at a higher than standard rate, VAT is payable and you can reclaim it.

Enforcement companies. Fine enforcement companies that operate car parks usually set their own terms and conditions rather than the car park owner. This is typical where public organisations such as hospitals contract out their parking arrangements. The enforcement company monitors the parking and issues and collects fines. Penalties charged in these circumstances are damages for breaking their terms and conditions; damages are outside the scope of VAT.

Tip. When in doubt whether VAT has been charged check with the organisation to which it’s payable before reclaiming it on your VAT return.

Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500