Are Any Funds Lost Through Fraud Tax Deductible

05/10/2024 - 7 minutes read
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Are any funds lost through fraud Tax deductible is a question that comes up often these days due to the growing number of online scams & frauds that businesses are exposed to in current times.

It depends upon the facts of each individual case

Wholly and exclusively aside, a view will need to be taken based on the circumstances and facts of each individual case.

The courts have interpreted the trade profits legislation to mean that if an item is a proper deduction according to the ordinary rules of accountancy it should be allowed unless it is expressly prohibited by legislation. In other words the courts have felt able to treat the concept of ‘profits’ as containing within itself the need to make such deductions as accounting practice would require

The approach to computing trade profits is a two-stage process as follows:

(1) Ascertain the profits of the trade for the period concerned, computed in accordance with generally accepted accounting practice.

(2) Adjust those profits in accordance with any tax rules or principles which differ from the accountancy principles.

There are also statutory rules which restrict or allow deductions – see BIM42060 and BIM42070 respectively. The relationship between rules which restrict deductions and those which allow deductions is considered at BIM42080. There are also a number of deductions rules which apply only to particular types of trade. These are described in the section of the guidance dealing with particular trades at BIM50000 onwards.

The statutory rules do not attempt to provide an exhaustive list of allowable deductions. Funds lost through fraud doesn’t feature directly amongst the allowable deductions. In essence, if there are no relevant tax rules or principles which affect a particular case, accountancy principles will determine whether and when a deduction is allowed.

Are Any Funds Lost Through Fraud Tax Deductible

Are Any Funds Lost Through Fraud Tax Deductible

HMRC manual BIM45851 | Specific deductions – losses: of stock or cash by fire etc

The loss of stock-in-trade or of cash in hand by fire, burglary, theft or the negligence of an employee is, in the ordinary course of events, an allowable deduction.

Where the loss is covered in whole or in part by insurance for the treatment of sums received under the policy, see BIM40750 onwards.

HMRC manual BIM45855 | Specific deductions – losses: defalcation by employee

Thefts by employees are deductible, whereas thefts by directors or partners are not deductible.

Losses arising from theft or misappropriation by an employee are normally allowable.

HMRC manual BIM45860 | Specific deductions – losses: due to bank failure

What to allow as a deduction and what recoveries to tax

You should allow a sum on current account lost through failure of a bank as a deduction up to a maximum of the amount normally kept at that bank to meet ordinary banking requirements of the business. The loan relationship rules for companies do not apply.

Where a provision is made in respect of such a balance because it is expected to be lost, relief will be available for the provision to the extent that it reflects the reasonable expectation of loss – see BIM46500 onwards for an explanation of the requirements for a provision to be allowable.

The loss will also be deductible if the bank account balance was held solely to facilitate the issue of credit or guarantees to trade creditors provided that the creditors are in respect of debts incurred on revenue account by the trade which suffered the loss.

Irrecoverable disbursements

Where disbursements are made on a client’s behalf by a professional person in the ordinary course of his profession, the amount of such disbursements rendered irrecoverable by the client’s failure may be allowed as a deduction.

In some cases you will need to consider the nature and use of the account and to analyse the balance lost in order to determine the extent to which relief may be available.

You should treat any distributions/receipts under the Financial Services Compensation Scheme as a trading receipt in circumstances where you would allow any loss arising as a trading deduction.

Does the loss of funds from the company’s current bank account therefore fall into HMRC’s view at BIM45851 that the loss/theft of cash in hand is an allowable deduction?

The question is, was the payment that resulted in loss of funds made in the normal course of trading, was it exclusively incurred for the purposes of the trade or was there any other motive or purpose that denies the test being met.

If a deduction is claimed, a full record of events, including a police report, etc, is retained. Any subsequent recovery of funds would be treated as taxable income.

How can MCL Accountants help you with determining whether funds lost through fraud are tax deductible and guide you on how to claim eligible deductions effectively?

Contact MCL Accountants on 01702 593 029 if you have any queries on this article “Are any funds lost through fraud Tax deductible” or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.