BIM37200 - Wholly & exclusively: case law: remoteness
What matters is the direct and immediate purpose of the expenditure
A so-called ‘remoteness’ test may be inferred from
the decision in Union Cold Storage Ltd v Jones [1924] 8TC725.
The company had carried on the trade of cold storage
proprietors on a worldwide basis, directly and through several
subsidiaries. In 1915, as a result of World War I, the company
faced difficult trading conditions. The company entered into an
unusual but ‘commercially expedient’ agreement to
transfer all of its overseas premises, plant, etc. to an American
company (controlled by Union Cold Storage’s principal
shareholders, members of the Vestey family).
For a period of 28 years (terminable at 7, 14 or 21 years)
the American company was to carry on the trades for its own
benefit, subject to fixed payments to the subsidiaries to enable
them to pay their dividends. No rent was payable for the premises
or plant, which were to be kept in proper repair and working order,
excepting wear and tear and damage by fire. An indefinite sum was
to be paid, if necessary, to make up Union Cold Storage’s
profits to a sum sufficient to provide for the fixed charges,
dividends and provision for depreciation fund. In fact nothing had
been paid under this clause as the remaining UK trade did very
well. The connection with the American company was profitable. It
was in the American company’s interest to provide supplies
for handling in the UK and thus diminish the likelihood of having
to make any contribution to profits under the agreement.
Union Cold Storage paid the fire insurance premiums on the
various properties and claimed them as a deduction. Referring to
the decision in Usher’s (see below) they claimed that the
premises were still being used for the purpose of their trade
through the arrangement with the American company. In the Court of
Appeal, the Master of the Rolls, Pollock, confirmed the
Commissioners’ denial of a deduction, the foot of page 740
and head of page 741 he placed limitations on the scope of the
‘Usher’ principle:
…it would be a very serious mistake and very misleading if the principle of the Usher’s Wiltshire Brewery case was to be supposed to be this: if you can find that the expenditure has been made on commercial lines advantageously for the purpose of the business…you are entitled to…secure any deduction. I do not think the rule was intended to be laid down so widely…
And in the lower half of page 741 of 8TC Pollock emphasises the need to look to the direct purpose for which the expense had been incurred:
I think that it is impossible for us to say that the test is satisfied…that money has been laid out or expended for the purpose of their, Appellents’, business, and that it has been laid out wholly and exclusively for their business. The two items that they seek to deduct may have been wisely expended; it may have been prudent that as owners they should keep the premises insured, but what they secured by it is not a further market for their business, not an increased sale of their commodities, not an enlarged use of their services which they are prepared to render; what they have secured is an indirect result perhaps useful to, but not necessary to their own trade. The rule in Usher’s case must not be pressed beyond what it is applicable to…you must look at what is the direct concern and direct purpose for which money is laid out, and I do not think that you can go to the remoter or indirect results for which it may be possibly useful to lay out money.
You can see that the Master of the Rolls also stresses the
importance of the purpose, as against the effect, of expenditure.
The remoteness test can be difficult to apply in practice and
is often of doubtful utility. You should look to establish the
direct purpose for which the money has been expended.
In Usher’s Wiltshire Brewery Ltd v Bruce [1914] 6TC399
the company owned or leased many licensed houses which they let to
tenants at a low rent in exchange for a covenant (a
‘tie’) requiring the tenant to buy all ales, beer,
wines and spirits from the brewers. The tie provided the company
with a ready market for its products at a price higher than it
could charge non-tied customers. Although the tenants were
responsible for rates and interior repairs, the company paid them.
The company claimed the rates, repairs, insurance and some
miscellaneous costs. There was also a Schedule A related issue that
was relevant to the legislation pre-1963.
Lord Summer explained why the expenditure was allowable
focusing on the brewery’s purpose and highlighting that an
incidental benefit to a third party did not preclude deduction; in
the lower half of page 437 of 6TC:
Where the whole and exclusive purpose of the expenditure is the purposes of the expender’s trade, and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party’s benefit, say that of the publican, or that the brewer…in his character of landlord, cannot in law defeat the effect of the finding as to the whole and exclusive purpose.
And towards the foot of page 437 of 6TC:
…the brewer is a brewer first and a landlord only afterwards. His rôle as landlord is subsidiary, an incident of his trade as brewer.
You see Lord Summer’s stress on the brewer’s purpose
in making the expenditure rather than on the effect. The purpose is
a question of fact to be established by evidence. A private benefit
to the payer, or a benefit to a third party may imply a non-trade
purpose but in any contentious case you will need to establish that
this is so to the satisfaction of the Commissioners. If such
benefit is merely an incidental consequence of the expenditure and
not a sought for purpose then the expenditure will be allowable if
there is a clear and immediate trade purpose.
You may face claims for the allowance of money or profit
foregone (for example, the situation where the taxpayer claims to
deduct a sum that would have been received had they acted
differently - see for instance Lowry v Consolidated African
Selection Trust Ltd [1940] 23TC259 see
BIM47110 ), or that if a particular
outlay is advantageous to the trade then it is allowable on the
authority of the Usher’s decision. But Ushers is really of
narrow application to trades where there is an especially close
relationship between landlord and tenant and cannot be stretched
too far. The Union Cold Storage Ltd v Jones [1924] 8TC725 decision
specifically distinguished Usher’s.
