BIM37707 - Wholly & exclusively: duality of, or non-trade: remuneration, etc: ‘excessive’ remuneration: establish the purpose
Remuneration paid for a non-trade purpose is not allowable
Remuneration that is paid for non-trade purposes is not
allowable. Where remuneration is paid significantly in excess of
market rates this can be an indication of the existence of a
non-trade purpose. If there is a non-trade purpose for paying
remuneration in excess of the commercial rate, then the excess
should be disallowed. You will need to establish such a purpose to
the satisfaction of the Commissioners in disputed cases.
In the case of Stott & Ingham v Trehearne [1924] 9TC69 a
firm consisted of a father and two sons, who were entitled to the
profits in equal third shares. For some years prior to that date,
the father had been sole partner and had employed his two sons in
the business, their remuneration consisting of salary and, in
addition, a commission on the profits at a rate fixed orally at the
beginning of each year.
Prior to 1915 the rate of commission for each son was one
twentieth of the profits, but this was increased to one tenth each
for the years 1915 to 1917 inclusive, and to one third each for the
years 1918 and 1919. A breakdown in the father's health in June,
1918, placed the entire responsibility of the business upon the
elder son until the end of that year when the younger son returned
from military service. In the accounts of the business the
commissions paid to the sons were shown as appropriations of their
father's profit.
Both sons had special knowledge of the business, and the firm
claimed that the whole of the remuneration paid to the sons by way
of salary and commission should be allowed as a deduction in
arriving at the profits of the business for IT purposes.
The Special Commissioners decided that the commission for the
years 1918 and 1919 was not on a commercial footing, and that only
up to 10% (instead of the full 331/3%) could it be regarded as paid
to the sons for services rendered as managers of the business, and
as deductible in arriving at the profits of the business for IT
purposes.
The High Court held:
- that the amount deductible in respect of the commission in question (as being money wholly and exclusively laid out for business purposes) was a question of fact, and
- that, as there was evidence upon which the Special Commissioners could properly come to their decision, the court could not review it.
Rowlatt J explained that the allowable remuneration was the
amount expended wholly and exclusively for the trade. The
Commissioners had considered all of the facts and decided that a
proper deduction would be 10%. Rowlatt J was unable to interfere
with this.
The Commissioners’ finding as to the amount of
remuneration that was wholly and exclusively for the purposes of
the trade was conclusive on the facts established. Most cases of
‘excessive’ remuneration are determined on their
particular facts. You should accept a deduction for remuneration
that is commensurate with the duties undertaken and at the rate
payable on an arm’s length basis by comparable employers.
For those who do not have ready access to tax case volumes,
the part of Rowlatt J’s judgement on which the above guidance
is based is set out below, 9TC foot of page 75 and head of page
76:
Then when the Commissioners come to decide it they also have expressions in the accountant's letters. I do not think it comes to much, but it is a little make-weight; that is all. Then the Commissioners say to themselves:’ Are we to take it that when the father gives his sons each as much of the business as he retains himself - he does not make them partners, but he gives them a third of the business each and retains the other third himself - is he really paying that exclusively for their services? He would have to pay them something substantial; we think 10 per cent should be attributed to that, but as to the rest he is giving it to them, and the question of what they are entitled to strictly as remuneration is merged in the payment by the father. We cannot allow it all as having been laid out for the purposes of the business.’ It is not for me to say whether 10 per cent is a right figure or not. I think that is the sort of question which the Commissioners are there to decide. In this case they are Special Commissioners, but they could have appealed if they liked to local business men as Commissioners, and the Special Commissioners are in the same position. I think they had materials before them on which they could come to this decision, and therefore I cannot possibly, in my judgment, review it.
