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6.5.8. Tax and Non-Tax Penalties and Similar Sanctions

Fines and penalties imposed for breaking the law are not deductible, although a deduction is usually available for legal costs incurred in defending such an action. Civil penalties, interest, and default surcharges (e.g. relating to certain VAT defaults) are also generally non-deductible, except for damages that are compensatory rather than punitive (e.g. damages for defamation payable by a newspaper company).

The rule that any amount paid by way of a penalty for breach of the criminal law is not deductible derives largely from case law and was explicitly said to be a policy rule. It is applied strictly; parking fines and fines for breaches of regulations, or for price-fixing, are not deductible.

The rule does not, however, extend to compensatory payments that are not punitive. So, settlements in relation to negligence that harms customers or patients, for breach of contract, or with employees for wrongful dismissal ought to remain deductible.